Case M.8297 - GE / BAKER HUGHES - Choose your …ec.europa.eu/competition/mergers/cases/decisions/m8297_1485_3.pdf · EUROPEAN COMMISSION DG Competition Case M.8297 - GE / BAKER HUGHES

EUROPEAN COMMISSION DG Competition

Case M.8297 - GE / BAKER HUGHES

Only the English text is available and authentic.

REGULATION (EC) No 139/2004

MERGER PROCEDURE

Article 6(1)(b) NON-OPPOSITION

Date: 31/05/2017

In electronic form on the EUR-Lex website under document

number 32017M8297

Commission européenne, DG COMP MERGER REGISTRY, 1049 Bruxelles, BELGIQUE Europese Commissie, DG COMP MERGER REGISTRY, 1049 Brussel, BELGIË Tel: +32 229-91111. Fax: +32 229-64301. E-mail: [email protected].

EUROPEAN COMMISSION

Brussels, 31.5.2017

C(2017) 3860 final

To the Notifying party

Subject: Case M.8297 - GE / Baker Hughes

Commission decision pursuant to Article 6(1)(b) of Council

Regulation No 139/20041 and Article 57 of the Agreement on the

European Economic Area2

Dear Sir or Madam,

(1) On 20 April 2017, the Commission received notification of a proposed

concentration pursuant to Article 4 of the Merger Regulation by which General

Electric Company ("GE", the United States) intends to acquire within the

meaning of Article 3(1)(b) of the Merger Regulation sole control over Baker

Hughes Incorporated ("BHI", the United States) by way of purchase of shares

("the proposed Transaction").3 GE is hereinafter referred to as "the Notifying

Party". GE and BHI are collectively referred to as the 'Parties', whilst the

undertaking resulting from the proposed Transaction is referred to as "the merged

entity"

1. THE PARTIES

(2) GE has a broad and diversified range of activities, including GE’s oil and gas

manufacturing and technology solutions spanning across subsea & drilling,

rotating equipment, imaging and sensing.

1 OJ L 24, 29.1.2004, p. 1 (the 'Merger Regulation'). With effect from 1 December 2009, the Treaty on the

Functioning of the European Union ('TFEU') has introduced certain changes, such as the replacement of

'Community' by 'Union' and 'common market' by 'internal market'. The terminology of the TFEU will be used

throughout this decision.

2 OJ L 1, 3.1.1994, p. 3 (the 'EEA Agreement').

3 Publication in the Official Journal of the European Union No C 133, 27/04/2017, p. 7.

PUBLIC VERSION

In the published version of this decision, some

information has been omitted pursuant to Article

17(2) of Council Regulation (EC) No 139/2004

concerning non-disclosure of business secrets and

other confidential information. The omissions are

shown thus […]. Where possible the information

omitted has been replaced by ranges of figures or a

general description.

2

(3) BHI is active in the provision of oilfield services (OFS) on a global scale to oil

and gas exploration and production companies (E&P) with a focus on the drilling

and evaluation of wells as well as on the completion and production of wells.

2. THE OPERATION

(4) The Parties have entered into a Transaction Agreement pursuant to which GE will

acquire sole control over BHI by way of purchase of shares. GE will own 62.5%

of the voting and economic rights of a newly-formed company that will include

BHI and GE’s Oil & Gas business.

3. EUROPEAN UNION DIMENSION

(5) The undertakings concerned have a combined aggregate world-wide turnover of

more than EUR 5 000 million4. Each of them has a Union-wide turnover in excess

of EUR 250 million, but they do not achieve more than two-thirds of their

aggregate Union-wide turnover within one and the same Member State. The

notified operation therefore has an Union dimension within the meaning of

Article 1(3) of the Merger Regulation

4. MARKET DEFINITION

(6) The Parties activities in the OFS industry overlap in a number of areas. In

addition, the Transaction leads to a number of vertical relationships. More

precisely5:

Horizontal overlaps:

o Electrical submersible pumps (ESPs);

o Inline inspection services (ILI);

o Downstream and upstream chemicals;

o Permanent downhole gauges;

o ESP sensors.

Vertically relationships:

o Sensors (upstream) and wireline and drilling services

(downstream);

o Electric motors (upstream) and cementing services (downstream);

4 Turnover calculated in accordance with Article 5 of the Merger Regulation.

5 Both Parties are active in the provision of cased hole wireline services. However, no affected market arises

whether at EEA or worldwide level. At worldwide level, BHI's market share is [5-10]% and GE's is [0-5]%. In

the EEA BHI's market share is [20-30]% [information on GE's sales]. This horizontal overlap will therefore not

be further discussed in this decision.

3

o Pressure transmitters (upstream) and surface data logging (SDL,

downstream);

o Wireline tools (upstream) and wireline logging services

(downstream);

o ESP sensors, ESP bypass systems and autoflow valves (upstream),

and ESPs (downstream).

4.1. Electric submersible pumps (ESP)

4.1.1. Product market definition

(7) Artificial lift systems are used to lift the fluids up to the surface of the well by

increasing the pressure inside the production tubing. They are needed in wells

where the natural pressure in the reservoir is insufficient to lift hydrocarbons.

Only a small proportion of wells have enough natural pressure to allow the free

flow of fluids to the surface without artificial means. Moreover, this natural

energy decreases as wells age and come closer to the end of their production life-

span. In wells that do have enough natural pressure, the installation of an artificial

lift can also respond to commercial decisions of the oil company wishing to

increase the production of the well.

(8) The activities of the Parties in the EEA only overlap in the supply of ESPs, which

are a type of artificial lift system. Worldwide, the Parties' activities also overlap in

the provision of progressive cavity pumps (PCPs) and gas lifts.6

(9) The Commission has not previously assessed the market(s) for artificial lift

systems.

(10) The Notifying Party submits that ESPs should be considered a product market

separate from other types of artificial lift systems because each system has its

own specific features and cannot be interchangeably used. It argues, however, that

horizontal pumping systems should be considered as forming part of the same

market as ESPs. Finally, the Notifying Party submits that segmentation between

onshore and offshore ESPs is not warranted.7

4.1.1.1. Different types of artificial lift systems

(11) ESPs consist of a downhole pumping system that is electrically driven and

comprised of a series of centrifugal pumps which vary according to wellbore

characteristics. ESPs force fluids to surface by augmenting fluid pressure through

centrifugal force. They can be used in both vertical and horizontal wells to a

maximum depth of 15,000 feet, both onshore and offshore. Both BHI and GE

provide ESPs in the EEA and worldwide.

(12) There are several other types of artificial lifts, including PCP, Gas Lift, Rod lift,

Plunger lift, Hydraulic lift which function with different technologies.

6 Form CO, paragraph 279.

7 Form CO, paragraphs 304 to 306.

4

(13) While there is some overlap between the capabilities of different artificial lifts

(and different systems can be installed in the same well albeit at different stages

of its production life8), the market investigation consistently indicated that

different types of artificial lift systems have different specifications and address

different needs depending on the well's characteristics.9

(14) The Commission considers that ESPs constitute a separate product market for the

reasons set out below.

(15) First, from a demand-side perspective, each type of artificial lift is selected

according to the specific conditions of the well and the properties that adapt to it.

For example, lift requirements and pump rates differ for every pump. Gas lifts

and ESPs can cover the largest ranges of depth and flow rate, going until 14,000

ft. deep and 14,000 bbl/d (barrels per day), while rod pumps and PCPs are very

limited, only going 8,000 ft. and 4,000 ft. deep each and pumping 2,000bbl/d and

5,000 bbl/d respectively.10 Customers11 and competitors12 who responded to the

market investigation confirmed that artificial lift systems cannot be used

interchangeably. Temperature, depth and liquid rate are aspects that affect the

performance of artificial lift systems. In wells combining high temperature, depth

and high liquid rate for instance, an ESP is typically the preferred system because

of its enhanced performance as compared to other lifts.13 In general, ESPs are

viewed as the most sophisticated and versatile type of lift.

(16) Second, prices also vary greatly depending on the type of artificial lift. ESPs are

the most efficient artificial lift system and can be used in complex wells but they

tend to be more expensive than other systems, mainly because of the high cost for

repairing or replacing the ESP in case of damage.14 A competitor explained:

"ESPs are generally the most expensive form of lift because they provide higher

horsepower, higher flow rate, and higher pressure due to being at deeper levels

and more prolific wells. Rod Lift and PCP are next in line with lower flow rates

and lower depths and the systems will be 25-50% less expensive than ESP.

Hydraulic Lift is similar. Plunger Lift is the lowest cost form of lift since it uses

no external power and consists of only a few components. Gas Lift can vary

widely in cost depending on the size of the well."15

(17) Third, from a supply-side perspective, the Commission notes that the set of

available suppliers varies by type of artificial lift. The Parties are not active in all

systems16 and similarly, competitors do not offer the entire range of artificial lift

systems. Competitors also indicated that supplying different types of artificial lift

8 For instance, ESP are often installed first and replaced by rod lifts when the flow rate declines, given they are

more efficient in low production wells and less costly than ESPs (Replies to question 2.1 of Questionnaire 7 –

Customers ESP/ ILI).

9 Minutes of a call with a customer on 16 March 2017; Replies to question 3 of Questionnaire 7 – Customers

ESP/ ILI; Replies to question 6 of Questionnaire 2 – Competitors ESP.


11 Replies to question 2.1 of Questionnaire 7 – Customers ESP/ ILI.

12 Replies to questions 6 and 7.1 of Questionnaire 2 – Competitors ESP.

13 Minutes of a call with a customer on 16 March 2017.

14 Form CO, paragraph 314; replies to question 7 of Questionnaire 2 – Competitors ESP.

15 Replies to question 7.1 of Questionnaire 2 – Competitors ESP.

16 GE does not provide plunger lifts or hydraulic lifts and BHI does not supply rod lifts, plunger lifts or hydraulic

lifts anywhere in the world.

5

requires different expertise and production facilities.17 The market investigation

has confirmed the Notifying Party's view that horizontal pumping systems should

be considered as part of the ESP market. An horizontal pumping system is an ESP

mounted on a skid that is not installed downhole in a well to lift oil but on the

surface to transfer any type of fluids or inject them below the surface. The market

investigation indicated that all ESP manufacturers can provide horizontal

pumping because the equipment and the knowhow are fairly similar from an

engineering perspective.18

(18) In view of the above and in light of the results of the market investigation, the

Commission considers that ESPs, including horizontal pumping systems, form a

separate product market from other types of artificial lift systems.

4.1.1.2. Onshore and offshore ESPs

(19) The market investigation has revealed that from a technical point of view, the

pumps used in ESPs placed offshore follow the same technical principles as those

used for onshore.19

(20) However, the ESP systems need to be adapted/modified to cope with the specific

conditions present in wells located offshore.20 When deployed offshore, ESPs

typically feature higher horsepower to provide increased flow rates in order to

work efficiently in deeper wells found offshore. Also, offshore ESP systems need

to be more resistant to cope with harsher environmental conditions for a long

period of time.21 Offshore equipment imposes higher safety checks and testing

requirements by customers.22 The higher requirements of offshore ESPs lead to

higher costs, not only related to the price of the ESP system but also for

installation and maintenance. Installation costs for ESPs onshore are typically

around USD 180,000, while offshore they range between USD 500,000 to USD 1

million.23 The costs of maintenance and repair are also higher offshore than

onshore because of the large costs associated with intervening offshore due to

higher flow rate, ESP systems requiring additional inspections and enhanced

processes as well as the possible need of a rig. Moreover the increased costs of

non-productive time24 of offshore wells are also significantly higher given

offshore wells have typically higher oil production.25 As explained by a

competitor when referring to offshore ESP systems: "This level of sophistication

and cost may be considered overkill for the typical onshore well, while for an

offshore well, where the consequences of failure are much more serious,

17 Replies to questions 4 and 5.1 of Questionnaire 2 – Competitors ESP.

18 Replies to questions 5.2 and 5.2.1 of Questionnaire 2 – Competitors ESP; minutes of a call with a competitor

on 3 April 2017.

19 Replies to question 6 of Questionnaire 7 – Customers ESP/ ILI.

20 Replies to questions 4 and 6 of Questionnaire 7 – Customers ESP/ ILI.


22 Replies to question 11 of Questionnaire 2 – Competitors ESP.


24 Non-productive time (NPT) is time that is spent by an operator without producing. It corresponds to foregone

revenue during repair or maintenance operations that entail to stop the production of a well.

25 Replies to question 12 of Questionnaire 2 – Competitors ESP; minutes of a call with a customer on 24 January

2017.

6

customers are likely to demand such higher standards and will be willing to pay

accordingly."26

(21) In the EEA, only two providers are active offshore, namely BHI and

Schlumberger (SLB). On the contrary, a number of additional suppliers are active

onshore, including GE, Canadian Advanced (CAI) and Novomet. While GE has

some offshore ESP installations outside the EEA, these installations are located in

shallow water where onshore equipment can be used (as they do not require

motors as powerful as the ones required to operate in the North Sea). In view of

the above and in light of the results of the market investigation, the Commission

considers that a segmentation of the ESP market between onshore or offshore is

appropriate for the purposes of this decision.

4.1.2. Geographic market definition

(22) The Notifying Party submits that the geographic scope of the market for ESPs is

at least EEA-wide, or worldwide in scope, owing to the fact that transport costs

are low and prices do not vary depending on geographic location. Differences in

regulations also do not play a role in segmenting the market and quality

requirements are generally tailored to the well characteristics regardless of

geographic location. Finally, the Notifying Party argues that local service teams

are not required.27

(23) The Commission considers that the geographic scope cannot be considered wider

than the EEA in view notably of the need for the suppliers to be able to send a

service team on site in a short timeframe. Suppliers who do not operate a local

base may cause customers to incur higher costs, mainly because longer lead times

would prolong the non-productive time (NPT) of the well.28 Customers will

typically require suppliers to be able to service their ESPs within 24 to 48h in

case of failure, and therefore suppliers that are located outside the EEA are

typically not considered as viable alternatives.29 ESP suppliers indicated that it is

not necessary to have a base in the country where ESPs are provided but at least

within the same region.30

(24) The arguments above are valid for both onshore and offshore, with the possible

exception of Norway. Norway applies specific standards issued by DNV Norsok

that results in higher costs as compared with equipment used in the UK sector of

the North Sea. However, given that GE is not active anywhere offshore in the

EEA the exact geographic market definition for the EEA offshore market can be

left open.


Commission considers for the purposes of this decision that the geographic scope

of the potential onshore market for ESPs is the EEA. For the potential market for

offshore ESPs, the market could be narrower than the EEA, potentially segmented

into the UK and Norwegian sectors of the North Sea. However, the exact

26 Replies to question 11 of Questionnaire 2 – Competitors ESP.


28 Minutes of a call with a customer on 13 January and on 16 March 2017.

29 Minutes of a call with a customer on 12 and 24 January 2017; replies to question 7.1 of Questionnaire 7 –

Customers ESP/ ILI.

30 Replies to questions 17.1 and 18 of Questionnaire 2 – Competitors ESP.

7

geographic market definition for offshore ESPs can be left open given the

proposed Transaction does not give rise to competition concerns under any

plausible geographic market definition.

4.2. Inline inspection services


(26) Inline inspection services are a type of pipeline services which seek to identify

threats bearing on oil or gas pipelines such as third party pipeline damage, metal

loss from internal and external pipeline corrosion, cracks, manufacturing defects

and pipeline mechanical damage.

(27) Pipeline inspections are mostly performed by robotic inspection vehicles ("pigs")

which, while travelling through the pipeline, will collect data then used to identify

the various threats. Around 70% of the pipelines can be inspected with a pig

("piggable pipelines"). Unpiggable pipelines can be assessed through a number of

other ways.

(28) The Commission has not previously assessed the market for ILI services. The

Notifying Party submits that ILI services should be considered as a single product

market without any further segmentation. A narrower product market definition,

distinguishing between either different services or between onshore and offshore

applications is not warranted. The Notifying Party argues that the suppliers of ILI

services are the same across the different segments of the market even though

experience might have a larger impact for offshore applications. 31

4.2.1.1. Different types of ILI services

(29) ILI services mainly comprise the four following types of services:

Metal loss services: detection of corrosion in liquid and gas lines;

Crack detection services: detection of cracks and axial flaws in liquid and gas

lines;

Geometry and mapping services: measurement of the consistency of the geometry

of the pipeline;

Integrity services: additional and more in-depth analysis of the data obtained from

the inspection services, providing information i.a. on the corrosion growth rate or

the strain of the equipment concerned.

(30) Both BHI and GE provide all these services in the EEA and worldwide.

(31) The market investigation confirmed that the various ILI services can be

considered to be part of a single product market as most of the suppliers offer the

full range of services (though some smaller providers may focus on specific

services).32

31 Form CO, paragraphs 682 et seq.

32 Replies to question 5 of Questionnaire 1 – Competitors ILI.

8

(32) In view of the above and the evidence available from the market investigation, the

Commission takes the view that a further segmentation of the ILI services market

by type of services provided may not be appropriate. In any event, the precise

market definition can be left open as the proposed Transaction would not give rise

to competition concerns under any plausible product market definition.

4.2.1.2. Offshore and onshore ILI services

(33) The market investigation yielded mixed results regarding the difference between

tools and services for onshore and offshore applications. While some respondents

stated that they do not consider the differences between offshore and onshore

services to be significant33

, as in both settings the tools are placed within a

pipeline34

, others underscored that for certain offshore applications, specific

services and tools were required due to more difficult operating conditions,

thicker pipeline walls and flow conditions.35

Further, more stringent certifications

are required by some customers for tools used in offshore settings.36

(34) The Commission considers that the precise market definition can be left open as

the proposed Transaction does not give rise to competition concerns under any

plausible product market definition.

4.2.1.3. MFL vs UT technology

(35) Two different technologies can be used for ILI services, UT and MFL. UT uses

acoustic tools to measure directly the diameter of the pipeline37

and MFL tools

measure disturbances in an electro-magnetic field.38

Even though both

technologies serve the same purpose of identifying threats bearing on the pipeline,

each technology has its own advantages and limitations, and there are also some

defects that only either of the two can detect (although both technologies can be

used to identify most of defects).39

(36) Broadly speaking, UT performs better in term of accuracy and precision.40

It also

performs particularly well with smaller diameters and shorter pipelines.41

MFL is

more suited for longer lines and larger diameter. 42

UT can only be used with a

liquid medium while MFL can be used both in gas and liquid pipelines.43

The

majority of customers indicated that they typically procure the two technologies44

through separate tender procedures 45

and for different types of applications.4647 In

33 Minutes of a call with a customer on 13 January 2017.


35 Replies to question 14.1 of Questionnaire 1 – Competitors ILI.

36 Minutes of a call with a competitor on 31 March 2017, and on 22 March 2017.

37 Minutes of a call with a competitor on 22 March 2017.


39 Replies to question 10 of Questionnaire 1 – Competitors ILI.




43 Minutes of a call with a competitor on 31 March 2017, on 29 March 2017.

44 Replies to question 60 of Questionnaire 7 – Customers ESP/ILI.

45 Minutes of a call with a competitor on 29 March 2017; replies to question 62 of Questionnaire 7 – Customers

ESP/ILI.

46 Replies to question 61.1 of Questionnaire 7 – Customers ESP/ILI.

47 Their choice is based on the specific requirements of the tendered project such as the type of defect to be

inspected, the configuration of the pipeline, wall thickness or the accuracy required (Minutes of a call with a

competitor on 22 March 2017).

9

the tender specifications customers typically indicate the technology (either UT or

MFL) that they require. Both technologies will generally not compete in the same

tender in view of their specificities. Therefore, demand side substitutability

between the two technologies appears to be limited.

(37) Supply-side substitutability however is possible. The market investigation has

confirmed that the main actors are able to offer both technologies, both at EEA

and worldwide level.48

Although some small suppliers specialise and offer only

one of them, according to providers which responded to the market investigation,

the decision not to offer the two technologies is rather a strategic direction49

than

due to technological limitations.50

It is feasible for an established player providing

one of the two technologies to start providing the other.51

(38) In light of the above, and the evidence available from the market investigation,

the Commission takes the view that a segmentation of the ILI services market by

technology could be plausible. However, the Parties' position in the ILI market

does not significantly vary whether it is segmented per technology. In any event,

the precise market definition can be left open as the proposed Transaction would

not give rise to competition concerns under any plausible product market

definition.


(39) The Notifying Party submits that the relevant geographic market is at least EEA-

wide and possibly global in scope. It argues that the competitive conditions and

the main competitors are broadly the same worldwide. Further, local presence is a

benefit but is not critical as staff and equipment are readily available across

regions. Finally, the Notifying Party indicates that there are no regulatory or other

restrictions constraining the provision of services across the world or in the

EEA.52

(40) The market investigation suggests that the market for ILI services is at least EEA-

wide and possibly worldwide in scope. The vast majority of respondents stated

that suppliers operate at worldwide level53 and customers do not restrict tenders to

those bidders with a base in the region where the project is located.54 The

majority of respondents also confirmed that even if local presence may represent

a competitive advantage, it is not essential to compete on the ILI services

market.55 This is because staff and equipment can be moved from one region to

another without significant difficulties/costs.56 Personnel are only required to be

on site when the tools are being deployed in the pipeline. Once the tools are in

48 Minutes of a call with a competitor on 31 March 2017; replies to questions 7 and 9 of Questionnaire 1 –

Competitors ILI.

49 Replies to questions 8 and 9 of Questionnaire 1 – Competitors ILI.

50 Minutes of a call with a competitor on 31 March 2017 and on 17 March 2017.



53 Minutes of a call with a competitor on 22 March 2017, on 29 March 2017, on 17 March 2017, and on 31 March

2017..

54 Minutes of a call with a customer on 13 January 2017 and on 12 January 2017.

55 Minutes of a call with a competitor on 22 March 2017, on 29 March 2017 and on 31 March 2017; minutes of a

call with a customer on 13 January 2017 and on 12 January 2017.

56 Minutes of a call with a competitor on 31 March 2017; minutes of a call with a customer on 13 January 2017.

10

place, the data analysis can be carried out remotely.57 ILI suppliers generally

operate from one single base that serves at least an entire region, if not the

world.58


Commission considers that in the present case, it can be left open whether the

geographic market are to be defined worldwide or EEA-wide as the proposed

Transaction does not raise competition concerns under any plausible geographic

market definition.

4.3. Downstream chemicals

(42) The Parties horizontally overlap in the production and sale of downstream

chemicals, i.e. chemicals used by a variety of industries in their production

processes. The Parties' activities mainly overlap in the supply of chemicals to

refineries and to the petrochemical industry. Contrary to GE, BHI is not active in

the supply of equipment for water treatment; hence this area will not be discussed

in this decision.


(43) The market for downstream chemicals can be segmented in different ways. First,

the market for downstream chemicals can be segmented by product categories,

namely water treatment chemicals, process treatment chemicals and fuel

additives. Each of the segments could be further segmented by product type,

sector or end-use.

4.3.1.1. Segmentation by product category

(44) While there are no precedents discussing this segmentation, in past cases59

the

Commission considered water treatment chemicals to be part of a separate

market.

(45) The Notifying Party considers that water treatment chemicals, process treatment

chemicals and fuel additives should be regarded as constituting separate product

markets. 60 The market investigation supported the Notifying Party's view

(46) From the demand-side, all the customers responding to the market investigation

indicated that the different product categories cannot be used interchangeably. For

example, one customer said that "the products are very application specific" and

another customer explained that "the goals and the technological circumstances

are different for water treatment, process treatment and fuel additives".61

A

customer indicated that although some chemicals in different product categories

ultimately perform the same task (for example, corrosion inhibition), "these

products are not interchangeable as they have very different properties".62

57 Minutes of a call with a competitor on 17 March 2015, and on 31 March 2017.

58 Minutes of a call with a competitor on 22 March 2017, on 17 March 2017 and on 31 March 2017.

59 Case COMP/M.6388 - Ecolab/ Nalco Holding Company; Case COMP/M.5327 – Ashland / Hercules.


61 Replies to question 5.1 of Questionnaire 6 – Customers downstream chemicals.

62 Ibid.

11

(47) As regards the supply-side, competitors indicated that there is limited

substitutability as the chemicals in different product categories are manufactured

with different input components which cannot be easily interchanged in the same

production line.63

(48) In light of the above and the results of the market investigation, the Commission

considers that each of downstream water treatment chemicals, downstream

process treatment chemicals and fuel additives are likely to form separate product

markets. However, the precise market definition can be left open as the proposed

Transaction would not give rise to competition concerns under any plausible

product market definition.

(49) The proposed Transaction does not lead to affected markets as regards fuel

additives, therefore they will not be discussed further in this decision.64

4.3.1.2. Segmentation by industry

(50) Chemical compounds are used by a number of different industries in their

production processes.

(51) Many manufacturing processes require water of a certain quality to ensure proper

equipment functioning and to prevent damage to finished products. Water

treatment chemicals have long been used – to varying degrees – in manufacturing

applications across the world. The standard practice is to distinguish among the

following sectors: petroleum refining; chemical processing, including

petrochemical; pulp and paper; textile; and other (such as the food and beverage

industry).

(52) Similarly, process treatment chemicals are employed in a number of sectors,

albeit predominantly in the hydrocarbon processing industry (HPI) and the

chemical processing (CPI) industry. The main sectors in which downstream

process chemicals are used are: HPI; CPI, including petrochemical; food and

beverage industry; power generation; and, the pulp and paper industry. The

Parties' activities overlap in the supply of downstream chemicals to the HPI and

CPI industries. The outcome of the market investigation suggests that a

segmentation by industry may be appropriate for the following reasons.

(53) First, suppliers indicated that chemicals used in different industries are specific to

the industrial sector for which they are manufactured and that depending on the

industry there are differences in the characteristics of the chemical product, such

as "viscosity, concentration / dosage rate, ph level... etc."65 A competitor said that

"there are certain differences in the demand of different industries which might

need a special adjustment of the product formulation or a special selection of the

raw materials used for the product".66 Second, the majority of the suppliers

responding to the market investigation indicated that they are not capable of

serving all the industries requiring water treatment chemicals.67 Manufacturers of

63 Replies to question 6 of Questionnaire 4 – Competitors dpwnstream chemicals.

64 The Parties' activities overlap in the supply to fuel additives in the HPI industry where BHI and GE have a

share of, respectively, [5-10]% and [0-5]%.

65 Replies to questions 9.1 and 12.1 of Questionnaire 4 – Competitors downstream chemicals.

66 Ibid.

67 Replies to question 10 of Questionnaire 4 – Competitors downstream chemicals.

12

process treatment chemicals are typically less specialised in some sectors

compared to suppliers of water treatment chemicals but nonetheless they rarely

serve all industries.


considers it plausible that each industry within the relevant product categories

(water treatment and process treatment chemicals) forms a separate relevant

market. In any event, the precise market definition can be left open as the

proposed Transaction would not give rise to competition concerns under any

plausible product market definition.

4.3.1.3. Segmentation by end-use application

(55) Downstream chemicals have several end-use applications. The primary chemicals

used in downstream services include antifoulants, corrosion inhibitors, emulsion

breakers, fuel additives, and anti-foaming agents.

(56) The Notifying Party claims that a segmentation by end-use application is not

appropriate because of the high degree of supply-side substitutability. 68

(57) According to the Notifying Party, chemicals are produced in batches and the same

equipment can be used to produce different chemical compositions. All

production lines are configured to allow the manufacturing of multiple products.

Thus, although the production of these chemicals requires different raw materials,

the same production lines are used and the main adjustments that need to be made

are: (a) clean the production line; (b) change raw materials; (c) change the set-up

of the production line. All these steps can be done in less than one day and entail

limited costs.

(58) The market investigation supported the Notifying Party's view. Suppliers

indicated that in general they are able to supply the full range of downstream

chemicals in any product category in which they are active.69

(59) The majority of the suppliers also confirmed that the same equipment can be

employed to manufacture different types of downstream chemicals. For example,

a supplier noted that "the same production line can be technically used to produce

all type of downstream chemicals although cleaning of the equipment would be

necessary to avoid contamination".70 The outcome of the market investigation

suggests that shifting production between different types of chemicals typically

takes only a few hours.


considers that a further segmentation by product or end use is unlikely to be

appropriate.


(61) The Notifying Party submits that, irrespective of the precise product market

definition adopted, the geographic scope of the markets for the supply of



70 Minutes of a call with a competitor.

13

downstream chemicals is at least EEA-wide. This is because: (i) suppliers and

customers tend to be active in multiple countries; (ii) transport costs are low

(below 5%); (iii) there are no trade and regulatory barriers in the EEA; (iv) there

is substantial cross-border trade in the EEA; and, (v) the entire EEA region can be

served by a few manufacturing facilities, without the need of a local presence. 71

(62) The outcome of the market investigation supports the Notifying Party's view that

the geographic market is at least EEA-wide in scope.

(63) First, customers and suppliers consistently indicated that downstream chemicals,

irrespective of the product category, can be shipped from afar, and even further

than the EEA.72 Some suppliers noted that downstream chemicals can be

imported to the EEA from other regions, but this may have a negative impact on

the overall price of the chemical.73

(64) Second, while customers typically require suppliers to provide additional services

at their premises,74 customers and suppliers responding to the market

investigation share the view that a pre-existing local presence in the vicinity of

the customers' premises is not necessary to win business. For example, a customer

noted that it "invites to tender not only suppliers who already have a local office

(or a subsidiary) in the region where the site is located, but also those who do not

currently have a presence near the site as long as the suppliers commit to

establishing a local presence once the contract is awarded". 75

(65) Third, the market investigation confirmed that regulations and industry

requirements are harmonised across the EEA.76

(66) Fourth, all the suppliers responding to the market investigation indicated that they

can serve the entire EEA territory and they can either relocate employees in the

proximity of the customer's locations or hire new local staff to provide

support/service to the customers.77

(67) In light of all the above and the results of the market investigation, and for the

purpose of this decision, the Commission considers that the geographic market for

downstream chemicals, irrespective of how the product market is defined, is

EEA-wide in scope.

4.4. Upstream chemicals

(68) The Parties' activities also overlap in the provision of upstream chemicals.

Upstream chemicals include a broad range of chemistries to address flow

71 Form CO, paragraphs 139 and 146.

72 Replies to question 11 of Questionnaire 6 – Customers downstream chemicals, and Replies to question 18 of

Questionnaire 4 – Competitors downstream chemicals.

73 Replies to question 18.1 of Questionnaire 4 – Competitors downstream chemicals.

74 These services generally consist of regular checks to the dosage and effectiveness of the chemicals and solving

any technical problem that may arise while using chemicals.

75 Along a similar line, another customer said that: "A commitment to install a local base would be sufficient […]

to engage in commercial relations with a supplier, especially if they already cooperate on another site".

(minutes of the call with a customer, 23 January 2017).

76 Replies to questions 10 and 11 of Questionnaire 6 – Customers downstream chemicals,


14

assurance, asset integrity, and product optimisation challenges in both onshore

and offshore oil fields and related applications.78

(69) The market for upstream chemicals could be segmented along similar lines as for

downstream chemicals, namely by product categories, industry and application.

However, the product as well as the geographic market definition can be left open

as the proposed Transaction does not raise any competitive concern even under

the narrowest plausible market definition.

4.5. Directional drilling services


(70) Directional drilling (DD) is a form of drilling which enables the drill string to

change direction in order to reach a target which is not directly beneath the

surface location of the rig. Such wells are called horizontal or deviated wells. The

objective of directional drilling is to hit multiple reservoirs from a single rig site

and/or to maximise the point of contact within a single reservoir.

(71) DD is always sold with Measurement-While-Drilling (MWD) services, which

consists of sensors that measure azimuth and inclination of the drill string thus

informing the directional driller about the location and direction of the drill string

in real time.

(72) Most of the time, DD/MWD services are provided together with Logging-While-

Drilling (LWD) services, which consist of sensors that measure and collect data

on the characteristics of the formation surrounding the bore head thus informing

the directional driller about the characteristics of the formation through which he

is drilling and the nature of the fluids which it contains.

(73) The Notifying Party submits that a distinction can be made between DD/MWD,

on the one hand, and LWD services, on the other hand, because DD services will

always be provided with MWD services, whereas LWD services are optional.79

(74) However, in a previous decision, the Commission considered DD, MWD and

LWD to be part of the same market for directional drilling, because they were

part of an integrated system that is often priced and sold together.80

(75) The Commission notes that the markets for DD, MWD and LWD services may

further be segmented into onshore and offshore services. O&G companies'

requirements with regard to the track record and the portfolio of OFS providers

are usually higher for offshore wells than for onshore wells. This is so, because

the costs of operating an offshore rig are usually much higher than for an onshore

rig. This is also in line with the fact that the markets for offshore services are

more concentrated than the markets for onshore services.

78 They are used primarily (i) to protect and extend the life of oilfield production equipment, production tubing

(downhole), and pipelines; (ii) to support the production process; and (iii) to treat and separate hydrocarbons

from water that is produced by oil and gas wells".


80 Case COMP/M.5839 – Schlumberger/Smith International, paragraphs 10 et seq.

15

(76) However, for the purpose of this decision, the Commission considers that the

exact scope of the product market definition can be left open, as the proposed

Transaction does not give rise to serious doubts even under the narrowest possible

market definition. The notion of 'DD' will subsequently be used to describe the

entire scope of DD/MWD/LWD services.


(77) In a previous decision the Commission considered that the market for DD

services is at least regional in scope, but left the decision open.81 There are

indications that the geographic scope of the market for DD services may be EEA-

wide or even smaller. In that regard, the Commission notes that the identity of the

relevant service providers and their respective market shares are different when

looking at the EEA and the worldwide figures and may vary according to

different regions within the EEA.


exact scope of the geographic market definition can be left open, as the proposed


market definition.

4.6. Wireline Logging Services

(79) Wireline logging services describe a range of services which are performed by

lowering tools, which are fixed on the end of an electric cable (i.e. the "wireline"),

into the borehole. Wireline logging services are generally segmented into open-

hole-wireline logging (OHWL) services and cased-hole-wireline-logging

(CHWL) services.

(80) The Notifying Party submits that some critical measurements can only be

obtained by wireline logging and notes that wireline logging services are usually

tendered separately from other oil field services.82 The Notifying Party further

submits that a distinction can be made between OHWL and CHWL services.

According to the Notifying Party, both services are performed at different stages

of the well development. Moreover, OHWL services tend to be more demanding,

because they are carried out during the drilling phase in the uncased well, whereas

CHWL services are performed after the well has been cased. The Notifying Party

also submits that both types of services are often tendered separately.83


4.6.1.1. Distinction between OHWL and CHWL services

(81) The Commission has not previously assessed the markets for wireline services.

However, on the basis of the outcome of the market investigation the Commission

considers that OHWL services constitute a distinct product market different from

CHWL services.

81 Case COMP/M.5839 - Schlumberger/Smith, paragraph 32.



16

(82) OHWL services are primarily reservoir evaluation services, which are performed

during the drilling phase in the uncased (i.e. open) borehole. By contrast, CHWL

services are performed after the borehole has been cased.

(83) The main purpose for OHWL services is the characterisation and evaluation of

the reservoir in order to determine whether to complete the well for production.84

By contrast, CHWL services are usually performed for a variety of other reasons,

only after the initial decision to complete the well for production has been taken.85

CHWL services are generally considered to be less sophisticated and more

commoditised than OHWL services.86

(84) A distinction between OHWL and CHWL services is in line with the fact that the

competitive landscape differs significantly between the two services. While a few

large OFS providers, such as BHI, provide both OHWL and CHWL services,

their respective market shares differ significantly between the two types of

services. In addition, the market for OHWL services is much more concentrated,

because it has higher barriers to entry, whereas the markets for CHWL services

are usually characterised by the additional presence of a number of smaller

providers some of which have entered this market in the EEA and worldwide in

the last five years.87

4.6.1.2. Onshore vs offshore

(85) The Commission further notes that the markets for OHWL and CHWL may

further be segmented into onshore and offshore services. O&G companies'

requirements with regard to the track record and the portfolio of OFS providers

are usually higher for offshore wells than for onshore wells. This is so, because

the costs of operating an offshore rig are usually much higher than for an onshore

rig. This is in line with the fact that the markets for offshore services are more

concentrated than the markets for onshore services.

4.6.1.3. Conclusion




market definition.


(87) There are indications that the geographic scope of the markets for OHWL and

CHWL may be EEA-wide in scope, and possibly even smaller. In that regard, the

Commission notes that the identity of the relevant service providers and their


85 CHWL services cover a variety of activities, including additional reservoir evaluation services, which may

verify the best spot for the perforation of the casing, perforation services, which start the production,

production logging services, which analyse the flow and the nature of fluids in the cased borehole in order to

optimise the productivity of the well, or well integrity services, which analyse the state of the casing of the well

and the completion equipment in order to detects faults or defects (Form CO, paragraph 792).


87 Form CO, paragraphs 839 – 843.

17

respective market shares are different when looking at the EEA and the

worldwide figures.


exact scope of the geographic market definition can be left open, as the proposed


market definition.

4.7. OFS Sensors

(89) GE manufactures sensors, which are then purchased by the large integrated OFS

providers, such as BHI, or by independent tool manufacturers for their respective

drilling tools. The customers integrate these sensors in their tools in order to take

a variety of measurements downhole.

(90) The Notifying Party submits that a distinction can be made between gamma

sensors, neutron sensors and directional sensors, because they have different

product characteristics and perform different types of measurements.88

4.7.1. Product market definitions

4.7.1.1. OFS Gamma sensors

(91) Gamma sensors are radiation detection devices, which use a crystal to measure

mainly the types of rocks and fluids in the borehole, in order to collect data about

the presence of hydrocarbons. There are various types of gamma sensors such as

gross-counting gamma sensors, which measure primarily the rock type and

density gamma sensors which measure primarily fluid types. Customers may use

various gamma sensors on the same tool in order to take multiple measurements.

(92) The market investigation suggests that the manufacturing of gamma sensors is

essentially an assembly business. Gamma sensors consist of a crystal, a

photomultiplier, electronics and a power unit.89 The crystal converts the gamma

ray radiation into a light pulse. Gamma sensors usually run sodium iodide (NaI)

crystals. The photomultiplier converts the light pulse into an electric signal. The

electronics process the data and the power unit provides the required amount of

high voltage.90

(93) Some suppliers manufacture one or more of these components in-house.

However, all of these components can also be purchased on the open market. For

example, crystals can be bought from a variety of crystal growers,91 such as Saint

Gobain (USA) or Alpha Spectra (USA).92 Photomultipliers can be bought from

companies like Hamamatsu (Japan) or ElectronTubes (UK). Electronics can be

bought from companies such as AHV (USA) or Antares (UK).93 In addition, data




91 Minutes of a call with a competitor on 11 April 2017.

92 Replies to question 4 of Questionnaire 3 – Competitors Gamma and Neutron Sensors.


18

acquisition software can be bought from companies like Scientific Data Systems

(USA).

(94) The added value provided by OFS gamma sensor manufacturers therefore lies in

the packaging.94 OFS sensors must often withstand high temperatures as well as

shock and vibrations. Specialised manufacturers such as GE and its competitors

have the relevant know-how to protect the sensor from these strains while

maintaining the functionality of the sensor.

(95) The market investigation confirmed that OFS customers cannot replace gamma

sensors with neutron sensors or vice versa, because both types of sensors perform

different measurements.95

(96) The market investigation further suggests that a distinction can be made between

gamma sensors for DD applications, sensors for OHWL applications and sensors

for CHWL applications. This is in line with the fact that each of these

applications presents a distinct set of challenges for the respective sensors. The

market investigation further suggests that a distinction can be made between

gamma sensors for directional drilling applications, sensors for open hole wireline

logging (OHWL) applications and sensors for cased-hole-wireline-logging

(CHWL) applications. This is in line with the fact that each of these applications

presents a distinct set of challenges for the respective sensors.

(a) Gamma sensors for DD applications need to be small (i.e. small enough to

fit into a pocket on a drill string), vibration resistant (i.e. rugged enough to

resist the vibrations from the drilling process) and heat resistant (i.e.

resistant enough to withstand the heat from the fluids present downhole).96

(b) Gamma sensors for OHWL applications also need to be heat resistant, but

they are not exposed to the vibrations of the drilling process, because the

OHWL sensors are lowered into the borehole while the drilling process is

interrupted. One market player considered OHWL gamma sensors to be

the least demanding of the three applications, partly because they can use

larger sensors than CHWL applications.97 However, larger crystals may

impose their own challenges as regards the 'packaging' of said crystal.98

(c) Gamma sensors for CHWL applications also need to be heat resistant, but

they do not need to be particularly vibration resistant, because they are

lowered into the borehole only after the drilling has stopped. In addition,

they operated in the cased borehole, so that they are shielded from the

formation by the cement casing. However, CHWL applications are often

smaller than OHWL tools in order to fit into the cased borehole, which

puts additional constraints on the size of the gamma sensor.

(97) While the Notifying Party submits that the design of the relevant sensors is

essentially the same across these applications, it acknowledges that the size and

94 Minutes of a call with competitors on 11 April 2017, and on 16 February 2016.

95 Replies to question 5 of Questionnaire 5 - Customers Gamma and Neutron Sensors.

96 Minutes of a call with a competitor on 16 February 2017.


98 Minutes of video conference with GE on 10 March 2017.

19

packaging of the sensors varies between the drilling applications and wireline

applications, mostly because OFS gamma sensors for drilling applications need to

be smaller, in order to fit into the drill string, as well as more rugged, because

they operate close to the drill bit and are thus subject to higher levels of vibration

and longer exposure to higher temperatures.99

(98) The market investigation indicated that there is only limited demand-side

substitution between OFS gamma sensors for different applications.100 While

sensors intended for DD applications may in some cases be used for OHWL and

CHWL applications, sensors for wireline applications may not be used in DD

applications, presumably, because their specifications do not qualify them to

withstand the vibration of the drill string (see recital (96)).

(99) The Notifying Party argues that in any case there is significant supply side

substitution between sensors for the OFS industry, because the main sensor

suppliers can easily customise and move into a different sensor type within a

reasonable period of time and without high expenses.101

(100) The market investigation suggests that suppliers of OFS gamma sensors for one

application may be able to start supplying OFS gamma sensors for another

application in a relatively short timeframe (within 9 to 24 months) depending on

the application and at costs of less than EUR 1 million. However, since this may

not be sufficiently swift to assume that OFS gamma sensors for the different

application belong to the same product market, these aspects will be assessed

further in the context of potential entry (see recitals (225) to (232)).

(101) While the downstream markets for DD services, OHWL services and CHWL

services may further be segmented in onshore and offshore services, the market

investigation indicates that no such distinction can be made with regard to

sensors.

(102) For the purpose of this decision, the Commission considers that it can be left open

whether the market for gamma sensors should be considered as whole or sub-

segmented between DD, OHWL and CHWL applications since the proposed


market definition.

4.7.1.2. OFS neutron sensors

(103) Neutron sensors are radiation detection devices, which measure the porosity of

the rock formation, in order to collect data about the prospects of extracting the

hydrocarbons captured in the formation. Neutron sensors usually operate with He-

3 gas or Li-6 glas. While there may be various gamma sensors on the same tool

taking different measurements, there is usually only one neutron sensor on each

tool in order to measure porosity.

(104) Neutron sensors are most commonly used in DD or OHWL applications where

porosity measurements are important for the drilling process. By contrast, neutron


100 Replies to question 6 of Questionnaire 5 - Customers Gamma and Neutron Sensors.


20

sensors are only rarely used in CHWL applications, because the OFS provider

will usually have already gathered porosity measurements before the casing of the

well and because it is difficult to make these measurements through the cement

layer of the cased well.102

(105) As for gamma sensors, the manufacturing of neutron sensors is essentially an

assembly business. Neutron sensors work with two types of technologies, either a

Helium-3 filed sealed tube or a Lithium-6 ("Li-6") doped glass scintillator. GE

offers both types of neutron sensors. In an Li-6 neutron sensor, neutrons interact

with Li-6 doped glass to produce a light pulse. A photomultiplier converts the

light pulse into an electric signal. In a He-3 neutron sensor, neutrons interact with

the He-3 gas and ionised particles are then captures as pulses on an anode wire

that runs through the centre of the tube.103

(106) While some suppliers develop one or more of these components in-house, they

can also be purchased on the open market. For instance, Detector Products, a

specialised manufacturer of neutron sensors, submitted that they purchase most of

the individual components from specialised vendors and then assemble them in-

house.104

(107) As mentioned above (see paragraph (96)), the market investigation confirmed that

OFS customers cannot replace neutron sensors with gamma sensors because both

types of sensors perform different measurements.105

(a) Similarly to gamma sensors, the market investigation suggests that a

distinction can be made between neutron sensors for DD applications, for

OHWL applications and for CHWL applications as each of these

applications presents a distinct set of challenges for the respective sensors.

Neutron sensors for DD applications need to be small (i.e. small enough to

fit into a pocket on a drill string), vibration resistant (i.e. rugged enough to

resist the vibrations from the drilling process) and heat resistant (i.e.

resistant enough withstand the heat from the fluids present downhole).106

In addition, with regard to He-3 based neutron sensors, DD applications

require the manufacturer to fit a relatively large quantity of He-3 gas in a

very small tube, imposing challenges with regard to the sealing of said

tube.

(b) Neutron sensors for OHWL applications also need to be heat resistant, but

they are not exposed to the vibrations of the drilling process, because the

OHWL sensors are lowered into the borehole while the drilling process is

interrupted. OHWL tools may allow for larger tools, since the uncased

hole provides more space than the cased hole. Therefore, neutron sensors

on OHWL tools may be larger, which allows for larger He-3 tubes with

lower pressure and less strain on the sealing.107







21

(c) Neutron sensors for CHWL applications also need to be heat resistant, but

they do not need to be particularly vibration resistant, because they are not

used during the drilling process. In addition they operate in the cased

borehole, so that they are shielded from the formation by the cement

casing. However, CHWL applications are often smaller than OHWL tools

in order to fit into the cased borehole, which puts additional constraints on

the size of the neutron sensor.108

(108) As for gamma sensors, the market investigation showed that there is only limited

demand-side substitution between OFS neutron sensors for different

applications.109

(109) The Notifying Party argues that there is significant supply-side substitution

between sensors for the OFS industry, because the main sensor suppliers can

easily customise and move into a different sensor type within a reasonable period

of time and without high expenses.110

(110) The market investigation suggests that suppliers of OFS neutron sensors for one

application may be able to start supplying OFS neutron sensors for another

application in a relatively short timeframe (within 2 to 24 months) depending on

the application and at costs of less than EUR 1 million. However, since this may

not be sufficiently swift to assume that OFS gamma sensors for the different

application belong to the same product market, these aspects will be assessed

further in the context of potential entry (see recitals (257) to (266)).




sensors.

(112) For the purpose of this decision, the Commission considers that the it can be left

open whether the market for neutron sensors should be considered as whole or

sub-segmented between DD, OHWL and CHWL applications since the proposed


market definition.

4.7.1.3. Directional sensors

(113) Directional sensors describe a group of sensors, which help the OFS provider to

locate the downhole tools in space by measuring the position of the drill string or

the wireline tool relative to the earth’s magnetic and gravitational fields.

Directional sensors are used in drilling and wireline applications. A typical

directional sensor consists of 3 single-axis accelerometers and 2 bi-axial

magnetometers mounted in a chassis that ensures alignment and orthogonality.111

The assembly also includes electronics to drive the sensors and process their

output. A further distinction may therefore be made according to the specific

measurements that the directional sensor performs.


109 Replies to question 5 of Questionnaire 3 – Competitors Gamma and Neutron Sensors..


111 Form CO, paragraph1071.

22




sensors.




market definition.

4.7.2. Geographic market definitions

(116) The Notifying Party submits that market for OFS gamma, neutron and directional

drilling sensors is global in scope, because sensor providers offer their products

globally and ship them to the various locations of their customers where they will

be incorporated in the relevant drilling tool.

(117) While the U.S. administration may prohibit the sale of sensors to certain countries

on sanction lists, the market investigation has confirmed that both customers112

and competitors consider the market to be otherwise global in scale without

transport costs or other barriers limiting the supply of sensors to certain areas.

Indeed, most sensor providers seem to have only one main manufacturing site

from where they supply their customers on a global level.113

(118) The Commission therefore considers that the markets for the supply of OFS

sensors are global in scope.

4.8. Wireline Tools

(119) GE manufactures wireline tools, which are then purchased by the large integrated

OFS providers, such as BHI, or by smaller OFS provider for their respective

drilling tools. There are two main types of wireline tools, namely OHWL tools

and CHWL tools.

(120) The Notifying Party submits that a distinction can be made between OHWL and

CHLW tools given that the two types of tools are used at different stages of the

well development and are used for different purposes.114


(121) OHWL tools are tools which perform reservoir evaluation services in the uncased

("open") well, while CHWL tools perform a variety of services in the cased well.

OHWL tools differ from CHWL tools in many ways.

(122) OHWL tools are lowered into the wellbore during or directly after the drilling

process, but always before the borehole has been cased. OHWL tools usually

112 Replies to questions 8 to 10 of Questionnaire 3 – Competitors Gamma and Neutron Sensors; Replies to

questions 8 to 10 of Questionnaire 5 – Customers Gamma and Neutron Sensors.

113 Form CO, paragraph 1147; replies to questions 36 to 38 of Questionnaire 3 – Competitors Gamma and Neutron

Sensors; minutes of a call with a competitor on 16 February 2017; minutes of a call with a competitor on 4

April 2017.


23

perform reservoir evaluation services. OHWL tools are larger in diameter than

CHWL tools and include probes and sensors for measuring rock properties and

fluids trapped in the rock formations.115

(123) By contrast, CHWL tools are lowered into the wellbore after the well has been

cased. They operate in the relatively protected environment of the cased well and

perform a variety of different tasks. CHWL are typically more commoditised

tools and often available off-the-shelf.116




market definition.


(125) The Notifying Party submits that the markets for OHWL tools and CHWL are

worldwide or at least EEA-wide in scope. The Notifying Party submits that tool

manufactures sell their tools globally from a limited number of manufacturing

locations.117 While some competitors have regional sales offices, others do not

have regional hubs.118 However, for the purpose of this decision, the Commission

considers that the exact scope of the geographic market definition can be left

open, as the proposed Transaction does not give rise to serious doubts even under

the narrowest possible market definition.

4.9. Permanent downhole gauges

(126) Permanent downhole gauges are sensors used primarily in wells not equipped

with artificial lifts or with artificial lift other than ESPs to measure certain data,

notably fluid temperature and pressure.

(127) Depending on the transducer technology used to measure physical changes,

permanent downhole gauges can be distinguished in: (i) quartz gauges (equipped

with quartz transducers) and (ii) strain gauges (equipped with strain transducers).


(128) The Parties submit that permanent downhole gauges are different from ESP

sensors notably in light of their different design119, the type of measurement,120

and commercial strategy.121





119 ESP sensors are connected directly to the ESP motor and are powered by the power cable of the ESP motor,

while permanent downhole gauges have their own power supply and signal cable, and operate independently of

any artificial lift equipment that may be installed in the wellbore.

120 The data measured by an ESP sensor typically includes data used to optimize production and to extend the life

of the ESP while permanent downhole gauges may be installed in naturally flowing wells (with no artificial lift

present) or in wells that are equipped with non-ESP artificial lifts, and are used to provide information related

to the well and reservoir.

24

(129) Customers almost unanimously indicated that the type of measurements

performed by the two types of products is different and that they "do not have the

same technical capabilities" While some customers indicated that in certain

limited situations there is a degree of interchangeability, this appears to be very

limited. On this basis the Commission considers that permanent downhole gauges

likely constitute a separate product market from ESP sensors.

(130) The Notifying Party also argues that strain permanent downhole gauges and

quartz permanent downhole gauges should be regarded as forming part of

separate markets because: (i) they are based on different technology, (ii) the

quartz technology allows for more accurate data measurement, faster transmission

rates, and higher resolution of the information, and greater long term reliability,122

and (iii) quartz gauges are typically three to five times more expensive than strain

gauges. 123 The Commission takes the view that a segmentation of the market for

permanent downhole gauges by technology, i.e. strain and quartz, is likely to be

appropriate as the market investigation indicated that:

(a) Customers do not generally consider the two technologies as alternative

and would not switch from one to the other in response to a small but

significant and non-transitory increase in prices. In the words of a

customer: "These gauges have different levels of accuracy and are used in

different applications and as such are not interchangeable".

(b) Quartz and strain gauges generally serve different applications. Quartz

gauges are primarily used in offshore wells and onshore geothermal wells

while strain gauges primarily in onshore wells.

(c) Prices of strain gauges are significantly lower than prices for quartz

gauges (quartz gauges can be up to ten times more expensive than strain

gauges).


(131) The Notifying Party submits that the geographic scope of the market for

permanent downhole gauges is at least EEA-wide, and possibly worldwide in

scope owing to the fact that downhole gauges share the same technical

characteristics irrespective of the location and are supplied by the same players

worldwide. 124


the proposed Transaction does not give rise to competition concerns under any

plausible geographic market definition.

121 While ESP sensors are mostly sold together with ESP, so that competition typically takes place for ESP and

ESP sensors combined, permanent downhole gauges are typically sold without artificial lift and competition is

not therefore linked to competition for artificial lift.

122 In addition, Quartz gauges can withstand higher fluid pressure and temperature than strain gauges.



25

4.10. ESP sensors

(133) ESP sensors are specific sensors used to optimize and/or enhance the operation of

an ESP. They are installed underneath the downhole ESP motor and powered by

the power cable of the motor. ESP sensors aim at optimising reservoir

performance and increase the ESP run life by measuring parameters on an

ongoing basis. Parameters measured are generally reservoir pressure, fluid

temperature, ESP pump intake and discharge pressure, motor temperature, system

vibration and current leakage. The vast majority ESPs are offered with the sensor

pre-installed, but some customers prefer using ESPs without sensors.


(134) The Notifying Party submits that ESP sensors should be considered as a single

product market, distinct from other types of downhole sensors.125 The market

investigation confirmed that the type of measurement performed by ESP sensors

differs in scope from the data measured by other downhole sensors. Respondents

to the market investigation indicated that downhole sensors are usually limited to

gather information related to pressure and temperature while ESP sensors offer a

wider range of data.126

(135) In view of the above, the Commission considers it likely that ESP sensors

constitute a distinct product market.


(136) The Notifying Party submits that the geographic scope of the market for ESP

sensors is at least EEA-wide, and possibly worldwide in scope owing to the fact

that ESP sensors share the same technical characteristics irrespective of the

location and are supplied by the same players worldwide.127


the Transaction does not give rise to competition concerns under any plausible

geographic market definition.

5. COMPETITIVE ASSESSMENT – HORIZONTAL OVERLAPS

(138) Under Article 2 (2) and (3) of the Merger Regulation, the Commission must

assess whether a proposed concentration would significantly impede effective

competition in the internal market or in a substantial part of it, in particular

through the creation or strengthening of a dominant position.

(139) In this respect, a merger may entail horizontal and/or non-horizontal effects.

(140) As regards horizontal effects, the Commission guidelines on the assessment of

horizontal mergers under the Merger Regulation (the "Horizontal Merger




26

Guidelines"128) distinguish between two main ways in which mergers between

actual or potential competitors on the same relevant market may significantly

impede effective competition, namely non-coordinated and coordinated effects.

Non-coordinated effects may significantly impede competition by eliminating

important competitive constraints on one or more firms, which consequently

would have increased market power, without resorting to coordinated behaviour.

In that regard, the Horizontal Merger Guidelines consider not only the direct loss

of competition between the merging firms, but also the reduction in competitive

pressure on non-merging firms in the same market that could be brought about by

the merger.

(141) The Horizontal Merger Guidelines list a number of factors which may influence

whether or not significant non-coordinated effects are likely to result from a

merger, such as the large market shares of the merging firms, the fact that the

merging firms are close competitors, the limited possibilities for customers to

switch suppliers, or the fact that a merger would eliminate an important

competitive force. That list of factors applies equally if a merger would create or

strengthen a dominant position, or would otherwise significantly impede effective

competition due to non-coordinated effects.

(142) This decision will analyse whether the proposed Transaction is likely to raise

doubts as to its compatibility with the internal market by the creation of non-

coordinated effects in those markets on which the Parties' activities lead to

horizontal overlaps.

5.1. ESPs

5.1.1. Onshore ESPs

The Notifying Party's view

(143) The Notifying Party submits that the proposed Transaction will not raise

competition concerns given GE is a rather small supplier both in the EEA and

worldwide. Moreover, the Parties will continue to face competition from the

market leader, SLB, as well as from other smaller suppliers active in the EEA

such as Borets and Novomet. The Notifying Party also explains that entry is not

difficult to provide the type of standard ESP systems GE supplies. 129

128 Guidelines on the assessment of horizontal merers under the Council Regulation on the control of

concnetrations between undertakings, OJ C 31, 5.2.2004, p. 5-18.


28

offering].132 As a result, going forward, GE's position would likely be even

smaller than suggested by its current market share.

(149) Second, the vast majority of the onshore customers indicated that they have

sufficient credible alternatives to which they could switch if need be.133 In

particular, SLB, CAI, Borets and Novomet are seen as valid alternatives to the

Parties.134

(150) Finally, customers view GE's technology as mainly limited to conventional wells

and standard applications, whereas BHI's ESP systems are more sophisticated and

can cover a wider range of applications.135 [Information on GE's ESP

products].136

(151) On the basis of the above considerations and in light of the results of the market

investigation and the evidence available to iy, the Commission considers that GE

does not exert a significant competitive constraint on BHI pre-Transaction and

that a number of suitable alternative suppliers will remain on the market post-

merger. Therefore, the proposed Transaction does not raise serious doubts as to its

compatibility with the internal market with respect to the supply of onshore ESPs.

5.1.2. Offshore ESPs


(152) The Notifying Party submits that the proposed Transaction will not raise

competition concerns on the offshore market for ESPs given only BHI is active in

the EEA. [Information on GE's sales strategy and R&D plans for ESP in the

EEA].137

The Commission's assessment

(153) Only BHI and SLB are active offshore in the EEA with a share of respectively

[40-50]% and [50-60]% in 2016. Some concerns have been raised by few market

participants indicating that GE has taken part in offshore bids in the EEA, already

works offshore outside the EEA and that it is making R&D efforts to upgrade its

equipment.138 Nevertheless, the Commission has found that GE is unlikely to

enter the offshore market (and to place a significant constraint on BHI and SLB)

in a short to medium term for the reasons set out below.



134 Replies to questions 10, 15 and 20.1 of Questionnaire 7 – Customers ESP/ ILI.


136 Minutes of a call with a customer on 13 January and 27 March 2017; replies to question 30 of Questionnaire 2

– Competitors ESP.


138 Submission from HAL dated 23 January 2017; Minutes of a call with a customer on 13 January 2017; Minutes

of a call with a competitor on 30 March 2017.

30

(157) As explained by a competitor: "The industry moves very slowly and GE is

suffering from this. For customers to change ESP supplier there needs to be a

compelling factor. Price does not qualify as a compelling reason to switch

suppliers in the EEA. […], especially offshore, where costs are in any case so

high the price of the ESP does not play a major role. Customers would rather

select an ESP supplier with a reliable track record and experience than a new

supplier they have no experience with providing a cheaper ESP."147

(158) Responses to the market investigation also indicated that other suppliers are in the

process of cooperating with customers operating offshore in the EEA to develop

alternative solutions.


investigation , the Commission considers that GE is unlikely to enter the offshore

segment given the high barriers to entry in the form of track record and reliability.

Therefore, as only BHI and SLB are active suppliers of offshore ESPs, the

proposed Transaction does not raise serious doubts as to its compatibility with the

internal market with respect to that market (regardless of whether the Norwegian

section of the North Sea is included or excluded).

5.2. ILI


(160) The Notifying Party submits that the proposed Transaction will not raise serious

doubts in view of the limited combined position of the Parties and the fact that a

significant number of players are active in the market, including Rosen, the

market leader by quite some distance.148

The Commission's assessment

(161) The Commission considers that the proposed Transaction will not materially alter

the structure of the market in view notably of BHI's small position and the

fragmented nature of the market. A market participant raised concerns indicating

that the merged entity will have a very broad portfolio that could impact the

ability of other suppliers to compete effectively and that both Parties are

important innovators, therefore the proposed Transaction could also reduce

innovation.149 Nevertheless, the Commission has found those concerns to be

unfounded for the reasons set out below.

(162) First, the Parties' combined share is approx. [20-30]% with a [0-5]% increment

brought by BHI. The merged entity will be the second largest supplier in the EEA

after Rosen, which will remain the market leader post-merger with a share almost

twice as large as the combined share of the Parties. The Parties will also face a

large number of other established suppliers.150 Customers largely confirmed they



149 Submission from HAL dated 23 January 2017.

150 Replies to question 19 of Questionnaire 1 – Competitors ILI; replies to question 69 of Questionnaire 7 –

Customers ESP/ILI.

35

water treatment and process treatment chemicals. These include Nalco, Kurita,

Chimec, Solenis, Veolia, Dorf Ketal, Berardinello and Adquimica. For example, a

customer noted that, "Generally, post transaction for each product there will

always be an alternative supplier to the merged entity",168 that "There are

sufficient suppliers in the market with good chemicals and know how" and that the

alternative suppliers are credible "[…] independent from product type".169

(180) Customers have also indicated that local/regional suppliers (i.e. suppliers with a

more limited geographic footprint than GE, BHI and Nalco) such as Kurita,

Chimec and Dorf Ketal are credible alternatives.170 Local/regional suppliers are

able to offer products with quality comparable to that of the global players and

generally they have a complete product portfolio.171

(181) Fourth, customers responding to the market investigation indicated that switching

suppliers is relatively common. Almost all the customers responding to the

market investigation switched suppliers in some of their plants in the last five

years. Of these switches, in a very limited number of instances, customers

replaced GE with BHI or vice versa.172 Also, customers in general consider the

cost of switching to be limited. For example, a customer said that "switching is

not extremely cumbersome both in terms of cost and time".173

(182) Finally, the market investigation supported the Notifying Party's view that the

industry is not capacity constrained. For example, a competitor indicated that it

could accommodate an increase in demand up to 50% - 60% more than its current

production and that, in addition, it is also looking to expand its blending capacity

in the EEA.174


investigation, the Commission concludes that the proposed Transaction does not

raise serious doubts as to its compatibility with the internal market with respect to

the supply of downstream water treatment chemicals (whether intended for HPI

or CPI) and downstream process treatment chemicals (whether intended for HPI

or CPI).

5.4. Upstream chemicals

(184) While BHI has a relatively established position with a share of approx. [20-30]%

in the EEA, GE has a negligible presence in the market. GE's share in the EEA (as

well as worldwide) is [0-5]% under any plausible segmentation of the upstream

168 Replies to question 18.2 of Questionnaire 6 – Customers downstream chemicals. Similar responses have also

been given for downstream water treatment chemicals.



171 Replies to questions 26.1.1 and 26.2.1 of Questionnaire 6 – Customers downstream chemicals.

172 Out of 41 switching episodes reported in response to the market questionnaire, 5 (12%) were instances of

switching between the Parties. Of the switching episodes 20 related to process treatment chemicals and in 3

instances customers switched the Parties. 13 related to water treatment chemicals and in 1 instance a customer

switched the Parties. The product category of the remaining 8 switching episodes was unclear (in 1 instance a

customer switched between the Parties). Source: replies to question 31 of Questionnaire 6 – Customers

downstream chemicals.



37

(191) Third, the vast majority of customers responding to the market investigation

indicated that there are sufficient alternative suppliers to GE and BHI to which

they could turn to post-merger.175

(192) Finally, all respondents to the market investigation indicated that the market for

permanent downhole gauges is competitive and that the proposed Transaction will

have no impact on its functioning and competitiveness.176


investigation and having regard to the minor increment created by the proposed

Transaction on a worldwide level [Information on GE's sales of gauges in the

EEA], the Commission considers that the proposed Transaction does not raise

serious doubts as to its compatibility with the internal market on the market for

permanent downhole gauges.

5.6. ESP sensors

(194) The major ESP suppliers are vertically integrated and have in-house production of

ESP sensors. As a result, external sales (ie. sales to third parties) are limited and

account for less than one quarter of the total ESP sensor market.177

(195) The Notifying Party submits that the proposed Transaction does not raise

competition concerns because (i) [Information on BHI's bidding activities for ESP

sensors], (ii) [Information on BHI's sales strategy for ESP sensors], (iii) there are

several alternative independent ESP sensor suppliers, and (iv) customers can

easily switch between manufacturers because ESP sensors are not specifically

engineered for a particular ESP and are essentially "plug and play" pieces of

equipment.178

(196) The Commission considers that the proposed Transaction is unlikely to raise

concerns in the market for ESP sensors for the reasons set out below.

(197) First, [Information on BHI's sales of ESP sensors in the EEA]. On a worldwide

basis the Parties combined share on a worldwide basis is approximately [30-

40]%,179 with a relatively small increment created by the transaction ([5-10]%).

(198) Second, the merged entity will continue to face competition from a number of

established ESP sensor manufacturers including: Sercel-GRC ([30-40]%),

Elekton ([10-20]%), Oxford Monitoring Solution ([10-20]%) and Triol ([5-10]%).

(199) Third, respondents to the market investigation indicated that the market is rather

competitive and that there are valid alternatives to the Parties.180

(200) Based on the above considerations and in light of the results of the market


175 Replies to questions 51 and 52 of Questionnaire 7 – Customers ESP and ILI.

176 Replies to question 53 of Questionnaire 7 – Customers ESP and ILI.

177 Form CO, Chapter B, Section II.


179 GE, [20-30]% and BHI, [5-10]%.

180 Replies to question 45 of Questionnaire 2 – Competitors ESP, and Minutes of a call with a competitor on 11

May 2017.

38

raise serious doubts as to its compatibility with the internal market for the supply

of ESP sensors in the EEA.

6. COMPETITIVE ASSESSMENT – VERTICAL RELATIONS

(201) According to the Non-Horizontal Merger Guidelines,181 non-coordinated effects

may significantly impede effective competition as a result of a vertical merger if

such merger gives rise to foreclosure.

(202) The Non-Horizontal Merger Guidelines distinguish between two forms of

foreclosure. Input foreclosure occurs where the merger is likely to raise the costs

of downstream competitors by restricting their access to an important input.

Customer foreclosure occurs where the merger is likely to foreclose upstream

competitors by restricting their access to a sufficient customer base.

(203) Input foreclosure may raise competition problems only if the upstream product

concerns an important input, if the merged entity has significant market power in

the market for the provision of this input and if – by reducing access to its own

upstream products or services, it could negatively affect the overall availability of

these inputs for the downstream market. In its assessment the Commission also

considers whether there are effective and timely counter-strategies that rival firms

would be likely to deploy such as the possibility of changing their production

process to reduce their dependence or the sponsoring of new suppliers in the

market for the provision of the input.182Customer foreclosure may raise

competition problems if the vertical merger involves a company, which is an

important customer with a significant degree of market power in the downstream

market. Customer foreclosure can in particular lead to higher input prices if there

are significant economies of scale or scope in the input market.183

(204) The competitive assessment as regards potential input or customer foreclosure is

not dependant on the downstream geographic market definition since sensors are

purchased and sold on a global basis.

(205) Finally, given that the Commission considers that the Notifying Party will have

no ability to foreclose its downstream rivals post-Transaction there is no need to

assess whether it would have an incentive to do so.

(206) With regard to the proposed Transaction, the Commission has analysed the in

particular the following vertical relations:

(a) Gamma sensors (upstream market where GE is active), and DD, OHWL

and CHWL services (downstream market where BHI is active)184;

(b) Neutron sensors (upstream market where GE is active), and DD, OHWL

and CHWL services (downstream market where BHI is active)185;

181 Guidelines on the assessment of non-horizontal mergers under the Merger Regulation , OJ C 265, 18.08.2008,

p. 6-25.

182 Guidelines for the assessment of non-horizonal mergers, paragraphs 33 to 39.

183 Guidelines for the assessment of non-horizonal mergers, paragraphs 60 to 67.

184 GE is also active on the market for CHWL, but has no activities in the EEA in that regard.

39

6.1. Gamma Sensors – DD, OHWL and CHWL services

(207) HAL is a large OFS provider and competes with BHI in the provision of OFS

services. In its complaint and subsequent submissions, HAL noted that it

purchases crystals for gamma sensors from GE and implied concerns in that

regard.186 HAL considers that GE is the leading supplier for gamma sensors.187

Moreover, while HAL recognises that there are alternative suppliers such as

Hunting-Titan and Saint Gobain, they are considered as less favourable

alternatives.188 HAL further submitted that an alternative supplier would need to

develop a high degree of specialisation and expertise to meet HAL's needs and

that the time and expense for switching suppliers would be significant.189

(208) However, for the reasons set out in the following section the Commission

considers it unlikely that the merged entity will have the ability to foreclose

downstream competitors from the supply of gamma sensors for DD, OHWL

and/or CHWL applications or upstream competitors from access to a significant

customer base as a result of the proposed Transaction.

6.1.1. Input foreclosure

No ability to foreclose

Important input

(209) The Notifying Party submits that the cost of the OFS gamma sensors is very small

compared to the cost of the services. The individual prices for OFS gamma

sensors may vary, but based on the information at hand, the prices for OFS

gamma sensor are approximately between USD 5 000 and USD 15 000 depending

on the application.

(210) These costs are relatively small compared to the costs of the downstream services.

The costs for directional drilling services may vary greatly, but overall the size of

the market for OFS sensors for drilling applications amounts to less than 1% of

the size of the markets for DD, OHWL and CHWL services. It follows that it is

unlikely that a sensor provider would be able to foreclose an OFS provider by

raising prices.

(211) Nonetheless, the Notifying Party does not dispute that gamma sensors are a

critical component for DD, OHWL and CHWL services from a technical

perspective.

185 GE is also active on the market for CHWL, but has no activities in the EEA in that regard.


187 Submission from HAL dated 2 March 2017.



41

markets for OFS gamma sensors192 and customers mentioned GE as an actual or

alternative supplier of gamma sensors.193

Alternative suppliers

(218) However, the market investigation indicated that there are valid alternatives to GE

for all relevant applications:

(a) Saint Gobain provides gamma sensors for DD, OHWL and CHWL

applications to a range of customers including large OFS providers as well

as OEM tool manufacturers.194 According to Scionix, a smaller gamma

sensor manufacturer, Saint Gobain can be considered the market leader in

gamma sensors for DD applications.195

(b) Hunting-Titan is an OFS tool manufacturer, which manufactures a variety

of tools and components including gamma sensors for DD, OHWL and

CHWL applications.196 Hunting-Titan sells these sensors both to large

OFS providers as well as to other tool manufacturers. [Information on

BHI's supply sources for gamma sensors]. Saint Gobain mentioned

Hunting-Titan as a main competitor for gamma sensors.197.198

(c) Scionix is a small but specialised supplier of OFS gamma sensors.

Currently, Scionix manufactures gamma sensors for OHWL and CHWL

applications,199 but considers that it could develop OFS gamma sensors for

LWD applications within a year and at costs of less than EUR 1 million.200

(d) HQTek is a small specialised supplier, who seems to have entered the

market in the last few years. Saint Gobain mentioned HQTek as a main

competitor for gamma sensors.201

(219) Besides, in the course of the market investigation, market players mentioned a

number of smaller sensor manufacturers such as Centronic (UK)202 or Rexon

(USA).203

Switching

(220) Contrary to what seems to be suggested by HAL, the market investigation

suggests that OFS customers are able and willing to switch suppliers. BHI

switched from GE to [Information on BHI's supply sources for gamma sensors]

192 Replies to question 16 of Questionnaire 5 – Customers Gamma and Neutron Sensors.












42

for certain high-temperature gamma sensor for DD applications in 2014,

[Information on BHI's supply sources for gamma sensors].204 Another OFS

provider switched to Hunting-Titan for its supply of gamma sensors for DD

applications in 2012.205 Bench Tree switched from Hunting-Titan to CBG for its

supply of gamma sensors for DD applications in 2017.206

(221) The market investigation further suggests that OFS customers can switch their

sensor providers relatively quickly. While OFS customers often require extensive

testing before contracting a new supplier, the process can be significantly

accelerated. Bench Tree, a smaller OFS provider, noted that it can qualify a new

supplier within 5-10 months at costs between USD 100 000 and USD 700 000.207

Another OFS provider submitted that it could qualify a new supplier within eight

months at costs of USD 150 000. Saint Gobain confirmed that customers can be

more lenient with the qualification process when they approach a provider with a

specific problem.208 Scionix submitted that in such situations OFS providers may

be willing to test new sensor almost immediately and do not require the full test

cycle.209

Capacity

(222) The market investigation also suggests that there are no capacity constraints in the

industry.

(223) The information provided by the Notifying Party suggests that there is significant

spare capacity in the markets for gamma sensors, because the total demand has

significantly decreased over the last years.210

(224) Saint Gobain noted in that regard that there is currently sufficient capacity in the

market to accommodate a significant increase in demand. This is mainly because

the overall demand for OFS sensors has decreased due to the decline in activity in

the OFS industry. Saint Gobain believes that the capacities which were built in

2011-2012, a period of high demand, are still around.211 Saint Gobain submitted

that it could accommodate additional demand from a major OFS customer within

6-8 months.212 This time period is mostly necessary to train new technicians.213

Entry

(225) Finally, the market power of the existing suppliers of OFS gamma sensors is

limited by the fact that new suppliers may enter the market.


205 Replies to question 20 of Questionnaire 5 – Customers Gamma and Neutron Sensors


207 Replies to question 19 of Questionnaire 5 – Customers Gamma and Neutron Sensors..



210 Form CO, paragraph 1151 and 1152.




43

(226) The Notifying Party estimates that a supplier of sensors for other industrial

applications should be able to start supplying the OFS industry within 6-18

months.214

(227) Indeed, according to the market investigation, entry is feasible within a moderate

timeframe and at moderate costs if the new entrant can rely on an experienced

engineer with a relevant track-record in the development and manufacture of OFS

gamma sensors.

(228) Saint Gobain considers that there are some barriers to entry with regard to know-

how and IP, because gamma sensors for the OFS industry need to resist shocks,

high temperatures and, in the case of DD applications, high vibrations.215

However, Saint Gobain estimates that a gamma sensor provider, active in the

manufacturing of gamma sensors for wireline applications, could start

manufacturing gamma sensors for DD applications within 3-9 months.216 A

gamma sensor provider, active in the manufacturing of gamma sensors for DD

applications, could start manufacturing gamma sensors for wireline applications

within 2 months.217 Even a gamma sensor provider from outside the OFS

industry could – with the help of an experienced engineer - start manufacturing

sensors for CHWL applications within 9 months, for OHWL wireline applications

within 12 months and for DD/MWD/LWD applications within 12-24 months.218

(229) Scionix submitted that the manufacturing of sensors is not very high-tech and the

equipment is not very expensive.219 Moreover, Scionix notes that the

manufacturing of sensors is essentially an assembly business and that all

important components can be purchased from third party suppliers.220 According

to Scionix, the key is to have employees with the necessary know-how and

previous experience in the sector, because the manufacturing process requires a

substantial amount of manual work by highly skilled people.221 Scionix submitted

that they entered the market after Saint Gobain bought the Dutch sensor

manufacturer Harshaw.222 They entered the market in 1993 and were profitable

from the first years on. Scionix does not currently manufacture OFS gamma

sensors for LWD applications. However, Scionix submits that if they could hire

an engineer with the relevant experience, entry could be achieved within 1 year

and at costs of less than EUR 1 million.223 Scionix added that new companies

usually enter by providing ad-hoc solutions to a specific problem and that – in

these cases – customers are ready to test new sensors almost immediately.224












44

(230) HQTek was mentioned as an example for a supplier that recently entered the

market for the production of gamma sensors for the OFS industry.225

(231) In addition, the market investigation suggests that in-house production is a viable

alternative. HAL submitted that it assembles some gamma sensors in-house. In

that regard, HAL submits that it purchases its NaI crystals for these sensors from

the Notifying Party and that other crystal growers do not meet HAL's

requirements. However, the market investigation has shown that there are various

other crystal growers,226 such as Saint Gobain (USA), Alpha Spectra (USA),

Amcrys (Ukraine) as well as Chinese crystal growers.227 The market investigation

suggests that these crystal growers are able to meet the requirements for gamma

sensors for DD, CHWL and OHWL applications. While GE's crystals may have

some specific characteristics, which make them the most favourable alternative

for HAL, the competitive landscape shows that it is possible for gamma sensor

providers to compete in this market without relying on GE's NaI crystals.

Conclusion

(232) In light of the evidence available to it and based on the results of the market

investigation and taking into account (i) the existence of alternative suppliers (ii)

the ability of customers to switch suppliers; (iii) the absence of capacity

constraints in the industry; and (v) the feasibility of entry in the market, the

Commission considers it unlikely that the merged entity would have the ability to

foreclose downstream competitors from the supply of gamma sensors for DD,

OHWL and/or CHWL applications as a result of the proposed Transaction.

6.1.2. Customer foreclosure

(233) BHI's shares in the downstream markets are relatively low. The Notifying Party

estimates that in 2016, BHI's share in the worldwide market for DD services

amounted to [20-30]%, its share in the worldwide market for OHWL to [10-20]%

and its share in the worldwide market for CHWL to [5-10]%, with the Notifying

Party adding an additional [0-5]% to the latter bringing the merged entity's

combined share in the worldwide market for CHWL services to [5-10]%.

Moreover, between 2014 and 2016, BHI already purchased the majority of its

gamma sensors for DD applications [percentage] from GE. Besides, while BHI

purchased [proportion] of its gamma sensors for wireline applications from

[confidential-contains business secrets] during this period, these purchases

amounted to merely [confidential]228 and represent a minor share in the overall

market for gamma sensors for wireline applications which – based on the

Notifying Party's estimates – amounted to at least USD [confidential-business

secrets] during this period.229

(234) Furthermore, the Commission notes that the market investigation has shown that

the sensor business is essentially a manufacturing and assembly business, where



227 Replies to question 4 of Questionnaire 3 – Competitors Gamma and Neutron Sensors


229 Form CO, paragraph 1151 – 1152.

45

economies of scale and scope play a less important role than in more

commoditised markets.

(235) Finally, the market investigation has also shown that sensor providers have

multiple alternative markets for their sensors. For example, they can and often do

sell to many other industries such as the security industry or the health industry.

(236) Based on the above considerations and in light of the results of the market

investigation, the Commission considers it , unlikely that the merged entity would

have the ability to foreclose upstream competitors from a significant part of their

customer base as a result of the proposed Transaction.

6.1.3. Conclusion

(237) It follows from the above, that although the Notifying Party may have a high

share in the markets for OFS gamma sensors, especially with regard to gamma

sensors for DD applications, there are viable alternative suppliers, switching

suppliers is feasible, there are no capacity constraints and providers for gamma

sensors for other applications can adapt their production process relatively

quickly to start manufacturing gamma sensors for other applications such as DD

applications.

(238) Based thereupon, the Commission therefore concludes that the proposed

Transaction does not raise serious doubts as to its compatibility with the internal

market in relation to potential foreclosure by the merged entity, either of its

competitors in the markets for DD, OHWL or CHWL services, or of its

competitors in the market for the supply of gamma sensors.

6.2. Neutron sensors – DD, OHWL and CHWL tools

(239) In its complaint and subsequent submissions, HAL submitted that it purchases

neutron sensors exclusively from GE. Its concerns mainly relate to neutron

sensors for DD applications, for which HAL claims to have no alternative

supplier.230 HAL submitted that it would be time intensive and costly to develop

an alternative supplier.231 In that regard HAL indicated that He-3 gas is not

readily available, because it does not occur naturally and must be manufactured in

a lab and stored for use.232 HAL also submitted that He-3 sensors are subject to

significant regulatory requirements.233

6.2.1. Input foreclosure

No ability to foreclose

Important input

(240) The Notifying Party acknowledges that neutron sensors are an important input in

the markets for DD, OHWL and CHWL services. As regards costs, the Notifying




233 Submission from HAL dated 10 May 2017.

48

(251) LND is another specialised sensor provider, which manufactures neutron sensors

for DD and wireline applications.244 Saint Gobain considers LND a competitor for

neutron sensors.245 Weatherford mentioned LND as an alternative provider of

neutron sensors for OHWL applications.246

(252) Kihei was mentioned by several market players as another manufacturer of

neutron sensors for the OFS industry. However, according to the market

investigation Kihei, which was founded in 2003, was acquired by SLB in 2006

and now only supplies SLB.247

Switching

(253) [Information on GE's customers for neutron sensors].248 [Information on GE's

customers for neutron sensors].249 This is in line with Detector Products'

submission that it was able to replace GE for the supply of neutron sensors for

several smaller clients as well as for one of the major players in the OFS

industry.250

Capacity

(254) According to the market investigation there are no capacity constraints in the

industry. The markets for neutron sensors have shrunk significantly over the last

years.

(255) The information provided by the Notifying Party suggests that there is significant

spare capacity in the markets for neutron sensors, because the total demand has

significantly decreased over the last years.251

(256) Saint Gobain also notes that there is no risk of shortage of He-3 that could hinder

a possible expansion.252 While there used to be a shortage in the early 2000s due

to high demand for He-3 for security portals, there is no such shortage anymore,

because security portals no longer use He-3 in the USA.253 Besides, Russia is a

major supplier of He-3.254

Potential Entry

(257) Finally, the market power of the existing suppliers of OFS neutron sensors is

limited by the fact that new suppliers may enter the market.

244 Form CO, paragraph 1122; replies to question 43 of Questionnaire 5 – Customers Gamma and Neutron

Sensors; minutes of a call with a competitor on 4 April 2017.

245 Replies to question 43.4 of Questionnaire 5 – Customers Gamma and Neutron Sensors

246 Replies to question 37.2 of Questionnaire 5 – Customers Gamma and Neutron Sensors.

247 GE, Email dated 2 May 2017.








49

(258) The Notifying Party estimates that a supplier of sensors for other industrial

applications should be able to start supplying the OFS industry within 6-18

months.255

(259) On the other hand, HAL notes that the production process for neutron sensor is of

a highly specialised nature.256

(260) However, according to the market investigation, entry is feasible within a

moderate timeframe and at moderate costs if the new entrant can rely on an

experienced engineer with a relevant track-record in the development and

manufacturing of OFS neutron sensors.

(261) Saint Gobain submitted that the manufacturing of neutron sensors for the OFS

industry presents several challenges related to the harsh environments in which

these sensors must operate. A new entrant would have to make investments in

filling stations and testing facilities and would have to undergo a lengthy

qualification process with its customers. However, Saint Gobain estimates that the

overall investment in equipment would amount to less than EUR 10 million.257

(262) Furthermore, Saint Gobain estimates that a neutron sensor provider, active in the

manufacturing of neutron sensors for wireline applications, could – with the help

of an experienced engineer – start supplying neutron sensors for DD applications

within 12-24 months.258 A neutron sensor provider, active in the manufacturing of

neutron sensors for DD applications, could – with the help of an experienced

engineer – start supplying neutron sensors for wireline applications within 2 - 6

months.259

(263) Moreover, while OFS customers may often require suppliers to undergo a lengthy

qualification process, Saint-Gobain also submitted that customers faced with

specific issues such as challenges imposed by high-temperature wells, are more

lenient with regard to the qualification process.260 In particular, they may accept a

sensor with a shorter timespan between repair or replacement (i.e. "meantime-

between-failures" or "MTBF") in order to address a specific problem.261

(264) This is in line with the fact that Detector Products, with the help of an

experienced engineer, managed to successfully enter the market in 2009.

According to Detector Products, the start-up capital was less than EUR 3 million.

They purchased the necessary equipment on the open market and then adapted it

to their needs.262 They then built a track record solving specific problems for

example related to very high temperature wells. Detector Products submits that

they enjoyed a strong and steady financial growth since their inception.263




258 Replies question 53 of Questionnaire 3 – Competitors Gamma and Neutron Sensors.

259 Replies question 53 of Questionnaire 3 – Competitors Gamma and Neutron Sensors.





50

(265) Moreover, the market investigation suggests, that an experienced engineer also

founded Kihei in 2003, which produced neutron sensors for the OFS and was later

acquired by SLB.264

(266) Scionix considers that it can start producing neutron sensors for the OFS within a

year and at costs amounting to "some hundred thousand EUR".265

Conclusion

(267) In light of the evidence available to it and based on the results of the market

investigation and taking into account (i) the existence of alternative suppliers (ii)

the ability of customers to switch suppliers; (iii) the absence of capacity

constraints in the industry; and (v) the feasibility of entry in the market, the

Commission considers it unlikely that the merged entity would have the ability to

foreclose downstream competitors from the supply of neutron sensors for DD,

OHWL and/or CHWL applications as a result of the proposed Transaction.

6.2.2. Customer foreclosure

(268) BHI's share in the downstream markets are relatively low. The Notifying Party






(269) Moreover, between 2014 and 2016, BHI already purchased [proportion] of its

neutron sensors for DD applications and wireline applications from GE.266

(270) Furthermore, the Commission notes that the market investigation has shown that

the sensor business is essentially a manufacturing and assembly business, where

economies of scale and scope play a less important role than in more

commoditised markets.

(271) Finally, the market investigation has also shown that sensor providers have

multiple alternative markets for their sensors, which they can sell to many other

industries such as the security industry or the health industry.

(272) In view of the above, it is unlikely that the merged entity will have the ability to

foreclose upstream competitors from a significant part of their customer base as a

result of the proposed Transaction.

6.2.3. Conclusion

(273) It follows from the above, that although the Notifying Party may have a high

share in the markets for OFS neutron sensors, especially with regard to neutron

sensors for DD applications, there are viable alternative suppliers, switching

suppliers is feasible, there are no capacity constraints and providers for neutron




51

sensors for other applications can adapt their production process relatively

quickly to start manufacturing neutron sensors for other applications such as DD

applications.

(274) The Commission concludes that the proposed Transaction does not raise serious

doubts as to its compatibility with the internal market in relation to potential

foreclosure by the merged entity, neither of its competitors in the markets for DD,

OHWL or CHWL services, nor of its competitors in the market for the supply of

neutron sensors.

6.3. Additional vertical relationships

(275) The proposed transaction gives rise to a number of additional vertical

relationships between the Parties:

(a) electric motors (upstream market where GE is active), and cementing

services (downstream market where BHI is active);

(b) pressure sensors and transmitters (upstream market where GE is active),

and surface data logging (downstream market where BHI is active);

(c) CHWL tools (upstream market where GE is active) and CHWL services

(downstream market where BHI is active).

(d) OHWL tools (upstream market where GE is active) and OHWL services

(downstream market where BHI is active).

(e) ESP sensors, ESP bypass systems and autoflow valves (upstream market

where GE is active), and ESPs (downstream market where BHI is active).

(276) As none of the above links raises particular competition concerns, they will be

briefly discussed each in turn in the following paragraphs.

6.3.1. Electric motors (upstream) and cementing services (downstream)

(277) The proposed Transaction creates a vertical relationship between cementing

services offered by BHI (downstream service) and electric motors supplied by GE

that are used by BHI and its competitors to provide cementing services.

The relevant markets

(278) Cementing services refers to the cementing of the casing in the well. It involves

the blending of cement, cement additives and water, which are then pumped down

through the casing and back up the annulus around the casing (or in the open hole

below the casing string). The pump is driven either by an electric motor or a

diesel engine. Cementing services are provided for both onshore and offshore

wells.

(279) In M.1140 - Halliburton/ Dresser, the Commission explained that storage,

blending and shipment of bulk cement on one hand and the provision of

cementing services in the rig are two separate markets. The Notifying Party

agrees with this distinction. Only the provision of cementing services on a rig is

concerned in the present case. The Commission also implicitly acknowledged a

52

segmentation between onshore and offshore cementing services.267 This

segmentation has not been disputed by the Notifying Party.

(280) Concerning the geographic scope of the market, in Halliburton/ Dresser the

Commission found that cementing services are regional and can be divided into

(i) UK sector of the North Sea, (ii) Norwegian sector of the North Sea and (iii)

Continental EEA.268 The Notifying Party agrees with this segmentation.

(281) Electric motors are used to drive the cement pump used in offshore cementing

services while diesel engines can be found in both onshore and offshore

cementing units. With a few possible exceptions, electric motors are not used in

onshore cementing because onshore rigs are typically in remote locations and do

not have access to the power grid or additional electric generation equipment

necessary to run the electric motors. Diesel engines are a readily available power

source for onshore cementing units and rigs usually have sufficient on-site diesel

fuel storage capacity for short-duration cementing operations. In onshore

applications, the cement pumping units typically are mounted on trucks that drive

from well to well. Either the diesel engine of the truck, or a separate diesel engine

mounted on the truck, drives the pump.

(282) The Notifying Party submits that the relevant market should comprise electric

motors for cementing services as well as for other drilling applications (such as

mud pumping, drawworks etc…) because they are largely substitutable. The

market investigation confirmed that the same electric motors are used for

cementing and other drilling applications interchangeably.269

(283) Regarding the geographic scope of the market for electric motors, the Notifying

party submits that it is at least EEA-wide or worldwide in scope given motors are

built in a given facility and then shipped worldwide to the site where the

cementing unit is assembled by the customer. [Information on BHI's cementing

units manufacturing locations]. In any case the Commission considers that the

geographic scope for electric motors can be left open given that no competition

concerns arise under any plausible market definition.

Competitive assessment

(284) The Notifying Party was only able to provide market share estimates for the year

2014, where GE's share for electric motors for drilling applications worldwide

was [30-40]%.270 It has confirmed that in the meantime its share has not increased

but probably dropped given other competitors such as NOV and Breuer have

started marketing new models of electric motors for drilling applications.271 BHI

has a modest share in the offshore cementing market in the EEA, both in the UK

and Norwegian sectors of the North Sea with respectively [5-10]% and [5-10]%

in 2016.

267 COMP/M.1140 – Halliburton/ Dresser, 6 July 1998, paragraph 27.

268 Ibid.

269 Replies to question 2 of RFI 17 – Competitors Cementing.

270 [Information on GE's sales of electric motors].


53

(285) BHI currently sources [proportion] its requirements for electric motors for

cementing units from GE, therefore no customer foreclosure can arise.

(286) The Commission considers that input foreclosure is also unlikely to arise for the

following reasons.

(287) GE would not have the ability to foreclose suppliers of offshore cementing

services. First, there are other suppliers on the market to which GE's customers

could switch such as ABB, Breuer, NOV or Siemens, were GE to stop supplying

them or raise prices.272 Second, cementing units have a long life span of

approximately 20 years during which electric motors are very rarely changed and

only in case of failure. Moreover, in that case, an electric motor from a different

supplier could be installed (subject to some technical adaptations).273 As a result,

GE would not have the ability to foreclose BHI's downstream competitors.

(288) In view of the above, the Commission considers that the proposed Transaction

will not give rise to any potential foreclosure regarding electric motors for

cementing services.

6.3.2. Pressure transmitters (upstream) and Surface data logging (downstream)

(289) The proposed Transaction creates a vertical relationship between surface data

logging (“SDL”) services offered by BHI (downstream service) and pressure

sensors/transmitters (“transmitters”) supplied by GE that are used by BHI and its

competitors to provide SDL services.


(290) SDL involves a chemical and visual analysis of rock cuttings and gases brought to

the surface in the drilling fluids (“drilling mud”). The analysis helps to identify

potentially productive hydrocarbon-bearing formations.274

(291) The Commission considers that the supply of SDL services constitutes a distinct

relevant product market. The market may be further segmented between onshore

and offshore services. Regarding the geographic scope of the market, the

Commission considers it likely that the market is not wider than the EEA.

However, as the proposed Transaction does not raise concerns under any

plausible market definition, the exact product and geographic scope of the market

for SDL can be left open.

(292) Pressure transmitters are installed on the surface to measure the pressure in the

drilling rig standpipe.275 SDL providers use the pressure measurements for

analysis and evaluation as well as safety services.



274 SDL also helps to ensure that the surface equipment is operating within appropriate performance, safety and

environmental levels and that the drilling process proceeds in a safe manner.

275 A pressure transmitter consists of a pressure transducer, which converts pressure into an electrical signal, and

of electronics that amplify the electrical signal so that it can be transmitted over distances to a computer system

that processes the electrical signal into pressure data.

54

(293) The Parties submitted that the relevant product market includes all pressure

transmitters irrespective of the end-application (whether SDL or mud pulse

telemetry) as the technology is the same. Regarding the geographic scope of the

market, the Parties submitted that the market is at least EEA-wide in scope, but

possibly wider, as manufacturers ship their transmitters from a few manufacturing

locations276 and customers do not require suppliers to have regional support

bases.277 The Commission considers that the product and geographic markets can

be left open as the proposed Transaction does not raise concerns under any

plausible market definition.


(294) The Commission has assessed whether the proposed Transaction may give rise to

any (either input or customer) foreclosure effect.

(295) The Commission considers that no input foreclosure would likely arise post-

merger for the following reasons: (i) GE has a relatively small share of the

pressure transmitters sales in the EEA ([10-20]%)278, and (iii) there are a number

of alternative suppliers of transmitters, including Viatran, Honeywell and

National Oil Varco.

(296) The Commission considers that the proposed Transaction is unlikely to result in

any customer foreclosure. First, while BHI is a relatively large player in the SDL

market (with a share of approx. [30-40]% in the EEA), there are other large

suppliers of SDL services, including HAL, SLB, Geolog and Weatherford.

Second, BHI already sources [proportion] of its pressure transmitters from GE,

and therefore even if post-merger BHI were to source all of its pressure

transmitters from GE, the sales of other suppliers of pressure transmitters would

unlikely be materially affected.

6.3.3. CHWL tools and CHWL services

(297) The proposed transaction creates a vertical relationship between the upstream

supply of CHWL tools and the downstream market for CHWL services. Although

this vertical relationship does not lead to a vertically affected market, the

Commission has analysed this relationship given that HAL has raised some

concerns in this respect and in view of the fact that the downstream market for

CHWL services may be smaller than EEA-wide.

Market Shares

(298) As regards the upstream market for the supply of CHWL tools, the Notifying

Party estimates that its share in this market amounted to [10-20]% over the last

three years (2014-2016) both EEA-wide and globally. In addition, the Notifying

Party estimates that its market share was closer to [10-20]% in 2016.279

276 [Information on GE's manufacturing locations for transmitters].

277 The Parties submitted that pressure transmitters do not require maintenance and cannot be serviced.

278 This figure includes sales of pressure transmitters for both SDL and mud pulse telemetry applications. GE's

share is below 5% if only transmitters used for SDL were to be considered.


55

(299) As regards the downstream market for CHWL services, in 2016 the Parties

combined share worldwide was [5-10]%. The Notifying Party does not provide

CHWL services in the EEA, where BHI's market share was [20-30]%.

Complaint

(300) HAL submitted that it purchases a number of CHWL tools from the Notifying

Party. Moreover, HAL purchases the relevant accessories and spare parts for its

existing fleet of tools from the Notifying Party. Furthermore, HAL notes that the

Notifying Party's CHWL tools have build-in telemetry systems, through which

the different tools communicate with each other and with the surface.280

Input Foreclosure

(301) The Commission considers it unlikely that the merged entity will have the ability

to effectively foreclose downstream competitors.

(302) The Commission notes that the Notifying Party has only a relatively small share

in the market for the provision of CHWL tools, both in the EEA and worldwide.

(303) Moreover, there are a number of alternative suppliers for CHWL tools such as

Spartek, Hunting-Titan or Hunter Well Science. According to HAL, none of the

alternative suppliers has the breadth, technological capability or aftermarket

support of GE. However, the Commission notes that some of HAL's main

competitors in the provision of CHWL services do not seem to rely on GE for

their CHWL tools and therefore rely on alternative sources of supply.

(304) Furthermore, the Commission notes that CHWL services have relatively low

barriers to entry when compared to OHWL services or DD services. During the

last five years a number of companies have entered the market for the provision

of CHWL services in the EEA.

(305) Based on the information at hand and the available market shares, the

Commission notes that the majority of CHWL service providers do not purchase

their CHWL tools from GE, but rely on alternative sources. While some of GE's

CHWL tools may be of higher quality than those of their competitors, the

competitive landscape in the downstream market shows that it is possible to

compete in the market for CHWL services without relying on the Notifying

Party's CHWL tools.

(306) Besides, with regard to HAL, the Commission notes that [Information on GE's

confidential contract conditions with Halliburton]. The Commission notes that –

with regard to a different market - one of HAL's competitors has purchased a

stock of OFS tools from its incumbent supplier in order to 'bridge' such a

switching period.

(307) Finally, the Commission notes that no other OFS provider has raised any

concerns with regard to this market.


56

Customer Foreclosure

(308) Moreover, the Commission considers it unlikely that the merged entity will have

the ability to foreclose upstream competitors from a significant part of their

customer base. BHI's position ([20-30]%) in market for DD services on a

worldwide level is relatively modest, and its position in markets for OHWL and

CHWL services are even smaller. The Commission also notes that no other OFS

tool provider has raised any concerns with regard to these markets.

Conclusion



foreclosure by the merged entity, neither of its competitors in the markets for

CHWL tools, nor of its competitors in the market for the supply of CHWL

services.

6.3.4. OHWL tools and OHWL services

(310) There is a vertical relationship between the Notifying Party's activities in the

upstream market for the manufacturing of OHWL tools and BHI's activities in the

downstream market for the provision of OHWL services. Although this vertical

relationship does not lead to a vertically affected market on the basis of an EEA-

wide market for OHWL services, the Commission has assessed this relationship

in view of the fact that the downstream market for OHWL services may be

smaller than EEA-wide .


to effectively foreclose downstream competitors, because the Notifying Party

estimates that its share in this market amounted to [0-5]% over the last three years

(2014-2016) on a worldwide level.281 The Notifying Party submits that it had only

sales to [business secrets] customers outside the EEA in 2016. [Business secrets]

customers are smaller OFS providers.282

(312) Moreover, the Commission considers it unlikely that the merged entity will have

the ability to foreclose upstream competitors from a significant part of their

customer base, even though BHI has a significant position on the markets for

OHWL in the EEA ([20-30]%) and a possibly higher market share if the markets

were regional, because OHWL tool manufacturers sell their tools on a global

level, where BHI's market share is relatively small ([10-20]%).



foreclosure by the merged entity, neither of its competitors in the markets for

OHWL tools, nor of its competitors in the market for the supply of OHWL

services.



57

6.3.5. Directional sensors – DD, OHWL and CHWL services

(314) The proposed transaction creates a vertical relationship between the upstream

supply of directional sensors and the downstream market for DD, OHWL and

CHWL services. Although this vertical relationship does not lead to a vertically

affected market on the basis of EEA-wide markets for DD, OHWL and CHWL

services, the Commission has analysed these relationships given that HAL has

raised some concerns in this respect and in view of the fact that the downstream

markets for DD, OHWL and CHWL services may be smaller than EEA-wide.

Market Shares

(315) As regards the upstream market for the supply of directional sensors, the

Notifying Party estimates that in 2016 its share in the worldwide market for

directional sensors for drilling application amounted to [5-10] – [10-20]% and its

share in the worldwide market for directional sensors for wireline applications

amounted to [0-5] – [10-20]%.283

(316) As regards BHI's activities in the downstream markets, the Notifying Party






Complaint

(317) HAL submitted that it purchases directional sensors, in particular magnetometers

for its DD applications, from GE. However, HAL notes that they have a contract

for additional magnetometers, which should provide HAL with sufficient

magnetometers to repair the existing DD tools for several years. However, HAL

is concerned about being able to repair or replace these tools if GE refuses to

supply magnetometers, once the contractual protection runs out.284

Input Foreclosure


to effectively foreclose downstream competitors. The Commission notes that the

Notifying Party has only a small share in the market for the provision of

directional sensors. There are a number of alternative suppliers such as JAE and

Microtesia. Based on the information at hand and the available market shares, the

Commission notes that the majority of OFS providers do not purchase their

directional tools from GE, but rely on alternative sources. While some of GE's

directional sensors may be of higher quality than those of their competitors, the

competitive landscape in the downstream market shows that it is possible to

compete in the market for DD, OHWL and CHWL services without relying on

GE's directional sensors. The Commission notes that no other OFS provider has

raised any concerns with regard to this market.



58

Customer Foreclosure

(319) The reasoning set out in paragraph (308) applies mutandis mutandis.

Conclusion

(320) Based on the above considerations and in the light of the results of the market


raise serious doubts as to its compatibility with the internal market in relation to

potential foreclosure by the merged entity, neither of its competitors in the

markets for directional sensors, nor of its competitors in the market for the supply

of DD, OHWL or CHWL services.

6.3.6. ESP sensors, ESP Bypass systems and autoflow valves - ESP


a) ESP sensors

(321) The relevant market definition for ESP sensors is discussed in section 4.10 above.

b) ESP Bypass systems (Y-tools).

(322) ESP bypass systems (Y-tools) are mechanical tools that can be installed on ESPs

to enable reservoir evaluation and intervention without removing the ESP. The

Notifying Party estimates that less than 5% of the wells are equipped with Y-

tools.

(323) The Notifying Party submits that Y-tools should be regarded as a separate product

market because they serve a specific purpose, which no other piece of equipment

can perform. The Notifying Party also submits that no further segmentation of the

market is appropriate because all Y-tools serve the same purpose and the

technical specifications depend only on the physical characteristics of the well.

According to the Notifying Party all suppliers of Y-tools can meet all the

technical specifications. The market investigation confirmed that Y-tools are not

interchangeable with any other equipment. For the purpose of this decision, the

Commission considers that Y-tools constitute a separate relevant market.285

(324) The Notifying Party submits that the geographic scope of the market for Y-tools

is at least EEA-wide, and possibly worldwide in scope owing to the fact that Y-

tools share the same technical characteristics irrespective of the location and are

supplied by the same players worldwide. The Commission considers that the

precise market definition can be left open as the Transaction will not give rise to

competition concerns under any plausible geographic market definition.286

c) Autoflow valves

(325) Autoflow valves allow continued flow to the surface when the ESP is switched

off and are installed when the well can produce without artificial lifts. The

285 Form CO, paragraph 509. 286 Form CO, paragraph 511.

59

Notifying Party estimates that less than 1% of the wells worldwide are equipped

with autoflow valves.

(326) The Commission takes the view that autoflow vales constitute a separate product

market because on the demand side they are not interchangeable with any other

component.

(327) The Notifying Party submits that the geographic scope of the market for autoflow

valves is at least EEA-wide, and possibly worldwide in scope owing to the fact

that autoflow valves share the same technical characteristics irrespective of the

location and are supplied by the same players worldwide. In any event, the

Commission considers that the precise market definition can be left open as the

Transaction will not give rise to competition concerns under any plausible

geographic market definition.287


a) ESP sensors - ESPs

(328) The Commission considers it unlikely that the Parties will have the ability to

engage post-merger either in input foreclosure toward ESP manufacturers or

customer foreclosure toward ESP sensors suppliers.


merger. While the Parties have a worldwide combined share of [30-40]% in the

sales of ESP sensors, there are other established players with significant shares,

including Sercel-GRC ([30-40]%), Elekton ([10-20]%) and Oxford Monitoring

Solutions ([10-20]%). Moreover, some of BHI's largest competitors downstream

(Schlumberger, Borets and Novomet) have their own in-house production of

sensors and thus are not dependent on the third parties.

(330) The Commission considers that no customer foreclosure would likely arise post-

merger in light of the fact that BHI’s purchases of third party ESP sensors for

resale with its ESP in the EEA is [business secrets] in each of 2015 and 2016.

(331) On the basis of the above, the Transaction does not raise serious doubts as to its

compatibility with the internal market as a result of the vertical overlap between

ESPs and ESP sensors.


60

b) Y-tools and autoflow valves

(332) The Commission considers it unlikely that the Parties will have the ability to

engage post-merger either in input foreclosure toward ESP suppliers or customer

foreclosure toward Y-tools and autoflow valves manufacturers.


merger for the following reasons: (i) [Information on GE's sales of Y-tools and

autoflow valves], (ii) there are a number of established suppliers active in these

markets, including Schlumberger, RMS Pumptools, ESPCT, PFT Systems.

(334) The Commission also considers that any customer foreclosure is unlikely to arise

post-merger since BHI already sources a significant proportion of its small needs

of autoflow valves and Y-tools from GE ([90-100]% of autoflow valves and

around [50-60]% of Y-tools). In any case, BHI accounts for approx. [30-40]% of

the ESP market in the EEA and therefore even if BHI were to source all its Y-

tools and autoflow valves from GE, GE's upstream competitors could still address

a large portion of the market.

(335) On the basis of the above, the proposed Transaction does not raise serious doubts

as to its compatibility with the internal market as a result of the vertical overlap

between ESPs and Y-tools and autoflow valves.

7. CONCLUSION

(336) For the above reasons, the European Commission has decided not to oppose the

notified operation and to declare it compatible with the internal market and with

the EEA Agreement. This decision is adopted in application of Article 6(1)(b) of

the Merger Regulation and Article 57 of the EEA Agreement.

For the Commission

(Signed)

Margrethe VESTAGER

Member of the Commission

Documents

Case M.8297 - GE / BAKER HUGHES - Choose your …ec.europa.eu/competition/mergers/cases/decisions/m8297_1485_3.pdf · EUROPEAN COMMISSION DG Competition Case M.8297 - GE / BAKER HUGHES